| Eric Mindich of Eton Park (Bloomberg) |
Eric Mindich’s Eton Park Capital Management has gotten off to a strong start this year.
The multistrategy hedge fund firm’s main portfolio rose between 7.03 percent and 7.14 percent in the first quarter, depending on the share class, while its total portfolio — which includes what the firm calls special investments — rose between 5.71 percent and 5.8 percent, according to its first-quarter letter, dated April 16 and obtained by Alpha.
The New York firm told clients that gains were broad-based “from all regions and strategies.” In fact, 18 positions gained at least 25 basis points while three lost that amount.
Performance was driven by Asia, especially Japan and China. “Our U.S. equity positions (both long and short) generated gains and our merger-related activity continued to contribute positively,” the letter added.
Eton Park also noted that it made money from derivatives and what it calls market strategies. Its special investments, on the other hand, lost 1.88 percent for the quarter, “largely driven by the markdown” of its investment in Volia, a Ukrainian cable television and Internet provider, according to the report.
Mindich made his name working on the risk arbitrage desk at Goldman Sachs, where at the time he was the youngest person ever named partner. Eton Park’s funds posted gains of between 5.6 percent and 6.4 percent last year after rising 22 percent in 2013 and 13 percent in 2012.
The first-quarter letter noted that in 2014 the firm moved most of its equity exposure outside the U.S. “We have believed for some time that U.S. equity markets were trading in the range of fair value and that U.S. opportunities going forward would be more idiosyncratic on both the long and short sides,” the letter elaborated.
On the other hand, the firm thought that broad “misvaluations” exist in Japan, China and to a lesser extent Europe. A look at its biggest gains in the first quarter underscored this sentiment and the wide variety of markets in which it invests.
The firm’s most profitable investment was what it calls Japan upside options, complementing a number of successful long bets on individual Japanese stocks. Eton Park said it still holds longer-dated upside options in Japan.
The firm’s next four sources of gains made roughly equal contributions to performance.
For example, Eton Park benefited from a long-standing short bet on the euro, which it said it built up “more meaningfully” in the spring of 2014. It pointed out that in the first quarter alone, the euro fell 11.3 percent versus the dollar. The letter said its positions have been set mostly through certain option trades, although it is now starting to unwind those positions. “Though we expect continued weakness in the euro, we have been harvesting gains in some positions that are approaching the maximum payouts,” Eton Park said.
The firm also said it did well playing upside options on the European market, thanks in large part to the big rally in European stocks, fueled by quantitative easing. Eton Park added, however, that the firm has since exited “the bulk of these positions.”
Eton Park also noted that it made good money from Volkswagen and Porsche, whose stocks rose 34 percent and 36 percent, respectively in the first quarter. It boosted these gains from out-of-the-money call options. Eton Park pointed out that Porsche gets most of its value from its stake in Volkswagen. It explained that the stocks benefited from general interest in German-export companies and overall fundamentals.
Finally, Eton Park also did well from its stake in the pharmaceutical company Allergan, building its position in late summer and early fall as speculation mounted over whether it would be acquired by Valeant Pharmaceuticals International or some other company, the client letter explained. Eton Park says it exited its position in November after Actavis offered to buy the company for $66 per share but jumped back in when the deal spread widened later in the year. As the spread widened, it bought more, “crystallizing” its gain by the time the deal was completed in March.
“This transaction is an example of our active approach to merger-related investing where we constantly monitor deal developments, reassess the risk/reward, and adjust our exposure to both the target and acquirer, accordingly,” the hedge fund firm explained.
