Magnum Global Investment Ltd. and GP Asset Management LLC have launched a new fund that focuses on stocks trading at steep discounts to their true value.
G2 Special Situations Offshore Fund invests in overlooked and under-priced companies that have an identifiable and quantifiable catalyst for unlocking value.
These so-called "special situations" companies may be emerging from bankruptcy or involved in spin-offs or restructurings or have other complex capital or corporate structures where the level of complexity discourages traditional investor interest.
"Often these investment opportunities are characterized by some sort of 'shock' that has caused short-sighted institutional money to rush out, resulting in a plummeting stock price," says Leonard J. Gross, portfolio manager. "We invest with the understanding of what has caused this shock and what catalyst or event is expected that will facilitate a change in perception so that the trading price will re-converge with the intrinsic value."
Gross, who has over 15 years of experience in the investment banking and hedge fund business, has worked with some of the premier firms, and traders, on Wall Street. His investment banking stints at Chemical Bank (now JPMorgan Chase), Citibank and Bank of Tokyo earned him a variety of skills in credit analysis, mergers and acquisitions, corporate finance and derivatives markets.
What sets him apart, though, are his eight years of hedge fund management experience. Gross received his initial tutelage at Steinhardt Partners, a multi-billion dollar hedge fund organization, and spent just over 4 years co-managing a USD 100m value fund at the Garnet Group, a private joint-venture with the Disney investing arm, prior to launching G2.
The strategy of G2 Special Situations Offshore Fund, as employed in a domestic partnership with the same strategy, has resulted in cumulative net returns to investors of over 76% from inception on January 1, 2003 through March 31, 2005. The fund has consistently and significantly outperformed all the major relevant hedge fund indices. Over this same period, the overall equity markets have been extremely volatile.
The fund's strategy involves maintaining a portfolio of about 25-35 core positions, a relatively concentrated number due to the depth of fundamental research involved with each investment. Positions are typically held for 12-18 months, due to the time it can take for the disparity between the trading price of a stock and its true value to be recalibrated by the marketplace.
As price changes tend to come from specific events that create a new perspective for investors, the fund's investments have low correlation to the broader equity markets.
"A stock market correction may reduce the value of our 'long' holdings," says Gross. "However, if there is no material adverse change in the business of a given company in our portfolio, we would view this market correction as an opportunity to purchase additional securities at more attractive prices. As long-term investors, we are not affected by the negative psychology associated with volatility of the market."
In addition to the deep value investment style itself, which inherently offers some floor of protection, the fund implements options, paired trades, and selective short selling to provide downside protection and generate a well hedged and market independent return.
The fund is sponsored by Magnum Global Investments, which was founded in April 1994 by its chairman, Dion Friedland, past president of the Hedge Fund Association, and specializes in identifying and partnering with leading hedge fund managers and strategies.
GP Asset Management, which jointly sponsors the fund, aims to create and distributes "best-in-class" alternative investment products that deliver consistent risk-adjusted returns across all market conditions. Since 1987 GPAM has served as a bridge between seasoned and start-up hedge fund managers and new sources of investment capital.