Scoggin Capital, Craig Effron and Curtis Schenker’s Returns and Alpha

Scoggin Capital’s Craig Effron and Curtis Schenker have been in business since 1988, returning in excess of 15 percent annually after fees. Scoggin had only two losing years in its 22-year history: it lost 1.3 percent in 2002 and a lot more in 2008. Their peak-t0-trough performance was -34% at one point during the crisis.

Curtis Schenker

Scoggin still hasn’t gained all it lost since October 2007 (See Scoggin’s 2010 returns).

In Katherine Burton’s Hedge Hunters, Craig Effron stressed that he’s a very cautious investor:

The most important lesson he learned as a commodities trader was to cut his losses when a position moved against him, and he applies the same rule today. “I am the quickest guy to sell stuff and buy puts,” says Effron, referring to a way of betting, through options, on the falling price of a security or index. “I do it more than I should.”

In a July 2008 interview with Reuters, Craig Effron and Curtis Schenker hit the nail on the head with the following words:

“Over our 20-year history, we have seen four markets that are similar to this one, albeit they were not as ugly. In each case, we made outsized returns in the ensuring years,” said Scoggin. “We fully expect this time will play out in a similar fashion.”

“We expect unbelievable opportunities to present themselves as this downturn plays out,” it said, but warned that “being too early is far more dangerous in this environment than being a bit late.”

They were very aware of the environment, yet they went on to lose 27% during the following 5 month period after the interview. They were too early even though they knew being too early is far more dangerous than being a bit late. Scoggin has a very long track record – and that speaks for itself. But we still wonder how they compare relative to other investment styles and whether they showed any stock picking skills during the past few years. We used Carhart’s four factor model to calculate Scoggin’s alpha and several betas.

In terms of its performance, Scoggin slightly benefitted its clients during the past 5 years. They had a monthly alpha of 19 basis points after expenses. Their market beta was 0.4 and they had a large cap tilt. They weren’t value or momentum investors.

We also calculated Scoggin’s alpha for the past 3 years. The crisis slightly interfered with their mojo, so to speak. Their alpha went down to 10 basis points per month. They didn’t change their market exposure (40% net) and shifted more towards large cap stocks. As a result, they’ve been underperforming the market since March 2009 mainly because their market beta is only 0.4.

These aren’t bad returns and alpha for average investors. But we believe hedge fund investors expect more than 10 basis points alpha after expenses. Whitney Tilson’s alpha was more than 40 basis points. Daniel Loeb’s alpha was more than 60 basis points. We even found some mutual funds such as Guggenheim Insider Sentiment ETF (NFO) or Tilson Dividend Fund (TILDX) that had more alpha than did Craig Effron and Curtis Schenker’s Scoggin. Despite this, Scoggin’s alpha is better than most mutual funds. Considering their long and successful track record, this might just be a rough patch that they are going through and we expect them to achieve glorious returns in the coming years.