Ricky Sandler’s Eminence Capital rolled out a new hedge fund in June, according to a letter sent to clients and obtained by Institutional Investor.
The fund, called Eminence Partners Neutral, has initially launched with internal capital only.
“We do not envision accepting meaningful net capital inflows via Eminence Neutral, but rather see it as a tool to attract and retain capital that is seeking a non-market correlated way to gain exposure to our stock picking and support us in managing to a strong and stable asset base,” Sandler told clients in the firm’s second-quarter letter.
He added that Eminence will initially run the fund with “neutral to roughly beta neutral exposures,” or plus or minus 20 percent, and with gross exposure at the high end of or higher than its typical gross exposure in its existing funds, which it calls its “Classic” funds.
“Eminence Neutral is designed to be a full replication of the Classic funds’ equity portfolio (except it will exclude any privates and index positions), re-sized to achieve the desired beta adjusted gross and net exposures,” Sandler added in the letter.
Eminence emphasized that the fund is not designed to be market neutral. Rather, it will reflect sector, industry and other biases that may exist in its Classic fund as the result of its fundamentally based stock picking.
“Given our historical track record of generating strong alpha on a large book of single-name short positions and our focus on generating a strong long /short spread, we think this fund will offer an interesting version of neutral exposure to address the increasing demand for non-directional investment strategies,” Sandler elaborated in the letter. “Recent traction and cohesion of our dedicated short team increases my belief that we have a scarce and improving capability in short alpha generation.”
He asserted that the firm has a good business reason for launching a neutral fund, noting that the structure provides “greater potential to earn incentive fees during market drawdowns and hence further enhance business stability.”
Eminence declined to comment.
Eminence Partners, the firm’s long-short fund, posted a 3.5 percent gain in the second quarter and 12.4 percent gain for the year through June, according to the letter. Eminence Partners Leveraged rose 5 percent in the second quarter and 18.4 percent for the half, while Eminence Partners Long gained either 3.3 percent or 3.6 percent for the quarter, depending on the fund class, and a little less than 20 percent for the year.
Eminence, which manages $7.3 billion, is bullish on the stock market. It began the third quarter running a gross exposure of 234 percent, which is above its historical average and up from 203 percent in the second quarter. Net exposure averaged 41 percent in the second quarter and recently increased to 47 percent.
“We continue to believe the environment is conducive to stock picking,” Sandler stressed. “From a high level, we see moderate economic growth, strong credit availability, high employment and only limited pockets of irrational euphoria in the equity market.”
So far this year Eminence has added nearly 30 new long positions that account for more than 1 percent of the portfolio each and nearly 40 new short positions that are over 75 basis points, “a pace that would double the amount of new long and short positions that we added in all of 2018,” he pointed out.
“The investment team continues to operate with a healthy pace of idea generation and research cadence, and we remain nimble and flexible to take advantage of the current and dynamic opportunity set,” Sandler added in the letter.
The firm is especially bullish on financial stocks. Thirteen percent of capital on the long side is deployed to just five companies: Credit Suisse, Charles Schwab, Morgan Stanley, American Express, and Citizens Financial.
Altogether, its top-ten positions account for 51 percent of equity. They are led by plastic packaging manufacturer Berry Global Group, specialty chemicals company Ashland Global Holdings, an Eminence activist target, fashion company Capri Holdings, auto racing promoter Formula One, and Chinese e-commerce giant Alibaba Group Holding.
