According to analysts at Morgan Stanley, traditional hedge funds experienced their worst quarterly performance since the financial crisis in the first quarter of this year. Equity long/short managers’ alpha, which measures their performance against broader market benchmarks, was at negative 4%, its lowest total in more than seven years. The hedge fund industry is widely known for its ability to generate alpha in a slow-growth environment, but the industry has failed to achieve this commonly-held belief thus far in 2016. Even so, tracking and examining hedge funds’ moves can be very informative for retail investors, especially when one zeroes in on the elite investors in the hedge fund industry. Therefore, we will discuss four fresh filings submitted to the SEC by several hedge fund vehicles tracked by Insider Monkey.
At Insider Monkey, we track around 785 hedge funds and institutional investors. Through extensive backtests, we have determined that imitating some of the stocks that these investors are collectively bullish on can help retail investors generate double digits of alpha per year. The key is to focus on the small-cap picks of these funds, which are usually less followed by the broader market and allow for larger price inefficiencies (see more details about our small-cap strategy).
Empyrean Capital Boosts Stake in Sears-Related REIT
In a new Schedule 13G filing, Empyrean Capital Partners LP, founded by Michael A. Price and Amos Meron, reported ownership of 1.35 million Class A shares in Seritage Growth Properties (NYSE:SRG), which account for 5.3% of the company’s outstanding common stock. This represents an increase from the stake of 1.07 million shares disclosed in the fund’s 13F filing for the October-to-December quarter. Seritage Growth Properties is a real estate investment trust (REIT) formed in June 2015 that wholly owns 235 properties across the United States and Puerto Rico, in addition to having interests in 31 joint venture properties. These properties include Sears Holdings Corp (NASDAQ:SHLD)’s 84 Kmart stores and 140 Sears stores, as well as an additional 11 properties leased to third-parties. These properties are leased to the embattled retailer under a master lease agreement that has an initial term of ten years, but also contains three options for five-year term renewals and a final option for a four-year renewal. As a result, the financial performance of the REIT is fully detached from the performance of the troubled retailer, which has seen its annual top-line results decline each year since 2007.
Seritage Growth Properties (NYSE:SRG)’s earnings are mainly derived from the rental revenue received from Sears Holdings and that rental income associated specifically with Sears totaled $64.8 million for the six month period that ended December 31, which accounted for 83.5% of total rental income. At the beginning of March, the REIT’s Board of Trustees declared a cash dividend for the first quarter of this year amounting to $0.25 per Class A and Class C unit of common stock, which equates to a dividend yield of 1.85%. The REIT’s Class A shares have gained 34% since the beginning of 2016. A total of 24 hedge funds in our database were invested in the REIT at the end of 2015. Gabriel Plotkin’s Melvin Capital Management owned 800,000 Class A shares of Seritage Growth Properties (NYSE:SRG) on December 31.
On the next two pages of this article we’ll discuss three other filings submitted with the SEC earlier this week.