A summary of Davidson Kempner Capital Management’s portfolio in the second quarter reveals that the firm made money in each of the first six months this year, a feat few funds can claim in this roller-coaster year for many of the world’s markets, according to a document offering a rare peek into the historically opaque firm.
The New York–based multistrategy hedge fund fund firm has posted a 6.3 percent gain in the first half of the year, with relatively low volatility compared with other hedge funds. The analysis also illustrates that Davidson Kempner has deftly taken advantage of the multistrategy model, according to a report from a fund-of-funds firm with an investment in the hedge fund firm.
Davidson Kempner was founded in 1987 by Marvin Davidson and Thomas Kempner Jr. Davidson retired in 2009. At the beginning of this year, the firm managed $22 billion, remaining the 18th-largest hedge fund firm in the world.
It is not clear exactly which portfolio the fund-of-funds firm is invested in. However, it tells clients that distressed securities “continued to drive” Davidson Kempner’s performance in the second quarter, led by Lehman Brothers Holdings, thanks to an additional distribution made to investors in the onetime investment banking giant back in April. “Securities in other Lehman Brothers entities increased in value as the market began to realize the true value of the post-petition interest and foreign currency claims against the estate,” the fund of funds’ report adds.
Like many other multistrategy and credit funds, Davidson Kempner received a boost from TXU Energy after the Texas power giant filed for bankruptcy in late April. Davidson Kempner also made money in structured credit when it liquidated a collateralized debt obligation of commercial mortgage-backed securities — in other words, a pool of commercial real estate mortgages — and sold the underlying assets at a premium.
Merger arbitrage also kicked in to profits, thanks in large part to Davidson Kempner’s position in Celesio, when health care company McKesson Corp. offered to buy 75 percent of the German drug and health care company’s shares. The hedge fund firm also made money from the acquisition of pharmaceutical company Forest Laboratories by drugmaker Actavis and the hostile offer for Botox maker Allergan by Valeant Pharmaceuticals International, according to the investor. As San Francisco–based hedge fund firm Farallon Capital Management did in the second quarter, Davidson Kempner is looking to increase its allocation to merger arbitrage due to the increase in global merger activity, the investor adds.
On the other hand, the firm’s long-short equity portfolio lost money last quarter, mostly thanks to the European portfolio. As a result, the fund took down its exposure to this strategy, especially in European stocks. “That exposure will be added back as the risk/reward becomes more compelling,” the fund-of-funds firm states in its report.
However, Davidson Kempner is not totally scaling back its activities in Europe. The investor says the fund will still actively buy distressed assets from European banks, especially in the real estate and shipping portfolios.
