Wednesday, October 30, 2013

"The Best Little Hedge Fund You Never Heard Of"

The post immediately below with its commentary on LTCM reminded me of another fixed income arbitrage fund that has lasted a bit longer than Meriwether and the Nobels did.
First posted September 2010:
From the New York Post:

Small fund, big $
Hoboken hedger 'swaps' places with titans

Call it the best little hedge fund you never heard of. 

Hoboken, N.J.-based Barnegat Fund is up a whopping 132 percent this year -- or $352 million -- hoisted through 2008's turmoil by its 40-year-old founder Bob Treue. By way of comparison, the average hedge fund is up less than 19 percent this year, and only a handful of funds have recovered 2008's harrowing losses.
Treue's fund lost 37 percent during the turmoil of 2008, but his triple-digit gains in the last 12 months have more than made up for the damage. 

The Detroit native, who lives just six blocks from his office and bikes to work, attributes his success in part to the lessons he learned from his first experience with financial calamity in 1998. It was the year of the infamous implosion of Long-Term Capital Management, a hedge fund that lost $4.6 billion in a matter of months, triggering fears of a wider financial damage and requiring a bailout orchestrated by the Federal Reserve....MORE
Here's a bit more on the fund from HedgeWorld:
Fixed income arbitrage: a marketer’s nightmare, a manager’s opportunity
By Bob Treue, Barnegat Fund Management

Fixed Income Arbitrage is most famous for going bankrupt. There is no shortage of examples, starting with Long-Term Capital Management in 1998-1999. The strategy is full of concepts that investors love to hate, such as leverage and adding to trades that lose money initially. However, 2012 has been a particularly good year for this type of relative value strategy.

In 2008, in the wake of the global financial crisis, many of the large fixed income relative value shops either went out of business (Endeavour Capital, Ross Perot’s Park Central, JWM) or shrank dramatically (Myron Scholes’ Platinum Grove, London Diversified). Since then, Dodd-Frank and the Volcker rule have also reduced the competition from bank proprietary desks. Considering the 2008 crisis, increased government regulation and the despised concepts of leverage and adding to losing trades, Fixed Income Arbitrage is a marketing disaster. As a result, the space is sparsely populated.

During this same post-crisis period, governments have increased their market interventions. Recently, the Europeans injected €1 trillion via the Long Term Refinancing Operation (LTRO) and another €200 billion via the Securities Market Program (SMP). The U.K. and the U.S. have also been active in their own versions of quantitative easing. These market interventions have produced a bevy of opportunities in the fixed income space.

As with any business, reduced competition and increased opportunities make for an appealing situation. Our Fixed Income Arbitrage fund, The Barnegat Fund, was able to survive 2008 and has outperformed for the last twelve years. Barnegat has a compound annual rate of return of 18%/year since our launch in 2001. Our share price has gone from 1.00 to nearly 8.00 during that time....MORE
We have no connections to Barnegat, no money with them, no old school ties, no nephews on their desk but think it's interesting to see an operation so different from LTCM playing in the same sandbox. Plus I like this approach noted in the Journal last year:
...Mr. Treue is honest about his strategy's potential downside, which is one reason he hasn't seen a rush of investors to his fund. He recently sent a letter to potential investors listing 11 reasons not to invest with Barnegat, including the fact that it only has six employees. Mr. Treue says "99% of investors pass" after they read his warning....