| Eric Mindich, Eton Park Capital Management (Bloomberg) |
Eric Mindich’s Eton Park hedge funds barely eked out gains of less than 1 percent in the third quarter. As a result, the multistrategy funds, managed by Mindich’s New York-based Eton Park Capital Management, are up about 2 percent, depending on the share class, excluding their special investments, according to the firm’s third-quarter letter, obtained by Alpha. The share classes that also include those illiquid investments are up less than 1 percent for the year, as the special investments posted a loss of 3.6 percent in the third quarter and 9.14 percent for the year to date, according to the letter.
Even so, the firm told clients that it sees good opportunities in the various markets it participates in and recently established a number of new positions.
Eton Park posted a 22.3 percent gain in 2013 in its Eton Park Fund and a 12.6 percent gain in 2012. Late last year it established a new share class with shorter liquidity of four quarters; its other share classes are limited to seven quarters. Investors in the new class can get their money back once a year.
We reported in July that investors pulled about $1 billion from the firm earlier this year. A person close to the firm said that at the time, some of the redemptions were related to longer lockup money that had finally been redeemed. This person also said the firm received some new money this year.
In any case, third-quarter results were mostly driven by gains from currencies and credit. The structured-credit portfolio alone was up more than 2.5 percent for the quarter, according to the firm. It also enjoyed “significant gains” from its derivatives positions, especially in its euro and yen shorts.
The hedge fund firm had made money in equities in the early part of the quarter, but Eton Park told clients it gave those profits back in September.
Going forward, the firm remains upbeat. “We are encouraged by the increased breadth and depth of opportunities that we are seeing in markets across the globe,” it told clients. “Despite the recent market turmoil, we are optimistic that the increased and broadened level of activity will continue to present attractive risk/reward opportunities.”
The firm said it has been very active in its U.S. equity portfolio and initiated a number of new positions, especially on the short side, mostly in technology and industrials. In many of these cases, the short positions relate to negative views of industries and company-specific fundamentals. But, no surprise, Eton Park did not say what companies it was shorting.
The firm calls its longs “idiosyncratic,” mostly involving companies “undergoing significant transition.” It cited, for example, its recently initiated position in Armstrong World Industries, a maker of floor and ceiling products.
In general, Eton Park said it is building many of its positions using options, citing “the generally low price of volatility.”
In Europe, where many investors and analysts are concerned about very low growth, Eton Park said it currently has a “modest” net exposure. It has a long bias toward what it calls core European Union countries, especially Germany, and shorts in the UK and Scandinavia.
In China, Eton Park said it has been active on both the long and short sides. It said it expanded its A-share portfolio — stocks that trade on the Shanghai and Shenzhen exchanges — adding Henan Shuanghui Investment & Development Co., a major pork processor and packaged-meat company, and Inner Mongolia Yili Industrial Group Co., a top-branded dairy company, stressing that the two companies are “defensive businesses with dominant market positions, and robust product development and distribution capabilities.”
They are offset by shorts in a number of Hong Kong companies in the industrial, health care, and food and beverage sectors “facing structural challenges or accounting issues,” according to the letter.
Eton Park’s biggest regional exposure, however, continues to be in Japan, where it made money in the third quarter. This portfolio is comprised of “single-name fundamentals holdings and options on the broader market,” the firm pointed out.
Its credit investments — the star performer in the third quarter as well as the full year — did well in the September period with its investments in residential mortgage-backed securities (RMBS) and its trust-preferred securities collateralized-debt obligation, or TruPS CDO, position. Eton Park told clients that it still had a meaningful TruPS exposure, recently adding two junior tranches.
Elsewhere in credit, Eton Park “exited the bulk” of its Lehman Brothers holdings and most of its municipal bonds.
Eton Park said it continues to be “excited” about the opportunities in mergers and acquisitions, recently increasing its investments in this area, noting that a number of conflicting developments have made it a “richer and more complex opportunity set.”
In the third quarter, Eton Park said it “substantially increased” its position in Covidien — a health care products company — which is now its largest merger-related position, betting its acquisition by Medtronic will close on the agreed-upon terms.
Eton Park also said it “actively traded” shares of Shire, the Ireland-based biopharmaceutical company, which had agreed to be acquired by AbbVie in a high-profile inversion deal, first ramping it up before reducing the stake in September after the narrowing of the deal spread. However, the firm emphasized that it fully closed out the position in October before AbbVie announced it was canceling the deal after the U.S. Treasury Department indicated it might try to rein in cross-border tax-driven deals. So, Eton Park was able to avoid big losses when shares of Shire subsequently plummeted.
In fact, Shire was its fourth-largest winner in the third quarter, following its investments in RMBS, TruPS CDOs, and the euro short.
