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After Big Q1, Daniel Lewis’ Picks Struggle In Q2

After starting the year on a good note, the stock picks of Daniel LewisOrange Capital appear to have faltered heading into the midway point. Orange Capital, a New York-based, event-driven hedge fund, was founded by Lewis and Russell Hoffman in 2005. The fund’s picks posted a strong gain of 10.5% for the first quarter of the year. However, more than half of those gains were washed away by the 5.7% loss the fund’s picks incurred in the second quarter, bringing their year-to-date returns down to 4.2%. The second quarter returns have been calculated on the basis of the weighted average returns of the eight stocks with a market cap of over a billion dollars that Orange Capital was long in at the end of March. Moreover, we have also excluded returns from short positions, bonds, and options in our calculations, hence it is quite possible that the actual returns of the fund during the quarter are significantly different from our estimates. In this article we are going to focus on three of the prominent losers in Orange Capital’s equity portfolio that contributed majorly to the fund’s picks losing 5.7% in the second quarter. They are  American Capital Ltd. (NASDAQ:ACAS), H & R Block Inc (NYSE:HRB), and NorthStar Asset Management Group Inc (NYSE:NSAM).

Daniel Lewis - Orange Capital

Before we proceed to analyze Orange Capital’s top losers for the quarter, it’s also important to deduce why most investors don’t understand hedge funds and indicators that are based on hedge funds’ activities. They ignore hedge funds because of their recent poor performance in the bull market. Our research indicates that hedge funds underperformed because they aren’t 100% long. Hedge fund fees are also very large compared to the returns generated and they reduce the net returns experienced by investors. We uncovered that hedge funds’ long positions actually outperformed the market. For instance the 15 most popular small-cap stocks among funds beat the S&P 500 Index by more than 80 percentage points since the end of August 2012. These stocks returned a cumulative of 139.7% vs. 58.7% gain for the S&P 500 Index (see the details). That’s why we believe investors should pay attention to what hedge funds are buying (rather than what their net returns are).

Robert Pitts
Robert Pitts
Steadfast Capital Management

Shares of Orange Capital’s second-largest holding, American Capital Ltd. (NASDAQ:ACAS) plummeted by more that 8% during the second quarter. The majority of that decline came after the BDC (business development company) declared its first quarter results for fiscal year 2015 on May 7. As of March 31, Orange Capital held over 6.37 million shares of the company valued at close to $106 million. Currently, shares of American Capital Ltd. (NASDAQ:ACAS) trade close to a 30% discount to book value, which is one of the largest discounts in the overall BDC industry. Most of the experts attribute that to the company not paying its dividends, and its high expense ratios. Four of the eight leading analysts that cover the stock have a ‘Buy’ rating on it, while the other four have a ‘Hold’ rating. Among the hedge funds we cover, Brian Taylor‘s Pine River Capital Management was the largest shareholder of  American Capital Ltd. (NASDAQ:ACAS) at the end of March, followed by Fir Tree.

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