Jeffry Gates’ Gates Capital Management’s Return, AUM, and Holdings

Jeffry Gates’ Gates Capital Management is an event-driven alternative asset manager founded back in 1996, which managed around $2.69 billion on a discretionary basis at the end of 2016. Besides being its founder, Jeffrey Gates is the current President and Portfolio Manager of the fund, whose headquarters are in the Big Apple. Before launching his own fund, he was a director at Schroder & Co., where he was concentrating on high yield bonds and post-restructuring equities; and, prior to being promoted to director, he worked at the same company as a high yield bond research analyst and as a high yield salesperson. The very beginnings of his career were at Kidder, Peabody & Company, where he was also a high yield bond research analyst. Aside from being a successful investor, Jeffrey Gates is also known for his philanthropy and was prized with the Golden Heart Award for Outstanding Volunteerism from Gods Love We Deliver. He graduated with a BS in Finance from Kansas State University and with an MBA from the Wharton School, University of Pennsylvania.

Jeffry Gates’ Gates Capital Management’s Return, AUM, and Holdings

Gates Capital Management employs an event-driven investing strategy, which means that the fund tries to benefit from brief stock mispricings that can happen prior to or after a corporate event occurs. Under the term ‘corporate event’ many structural changes within a company can be included, such as mergers/acquisitions, spin-offs, restructurings, bankruptcy, to name a few. This type of strategy is very demanding and asks for a team of experts to conduct a series of professional and detailed research. Besides being challenging, this strategy can be quite lucrative, as is for Gates Capital Management, whose ECF Value delivered averaged annualized gains of an impressive 17.5% a year since its inception (1996) through 2011. In spite of an amazing annualized return throughout the course of 15 years, ECF Value was hit by the 2008 market crisis when the fund lost 38%. Nevertheless, those faithful investors who continued to invest with Gates Capital Management must have been satisfied with its choice, as the fund managed to achieve an eye-popping return of 131% in the following year. Let’s examine the fund’s performance furthermore.

For example, its ECF Value Fund II LP had a 3-year compound annual return (ending December 2013) of 16.04%, while in 2013 alone it delivered strong 19.47%. Its ECF Value Fund, LP gained 19.66% in 2013 and then lost 1.37% in 2014, followed by an even more challenging year in terms of performance when it lost 19.77%. In 2016 it came back on its feet, delivering an impressive 31.01%, and strong 16.84% in 2017. Last year through October it reported a gain of 0.41%. ECF Value Fund LP’s total return was 1803.80% for a compound annual return of 14.1%, while its worst drawdown stood at 43.48.

Insider Monkey’s mission is to identify promising (and also terrible) hedge fund stock pitches and share them with our subscribers. We launched a long activist investing strategy in our monthly newsletter 2 years ago. This strategy’s stock picks returned 61% in 2 short years, vs. a gain of 21% for the S&P 500 Index ETF (SPY). Last October we shared one of our stock picks, Ascendis Pharmaceuticals (ASND), in a free sample issue of our monthly newsletter (you can still download it free of charge). The stock doubled in less than 5 months.

We have also been very successful at identifying stocks that will decline even in a bull market. We launched our short strategy a little more than 2 years ago and share our short stock picks in our quarterly newsletter. This strategy’s picks lost 27.5% since then, vs. a gain of 25% for the S&P 500 Index. This means our short strategy actually outperformed the market by 52.5 percentage points (let us know if you don’t understand how the outperformance for a short strategy is calculated).

Last week our monthly newsletter identified another undervalued stock that is expected to increase its earnings by more than 10% annually and trades at only 10 times its 2019 earnings. We expect this stock to return 60% in the next 12-24 months. Email us if you are interested in this stock or subscribe here. We take a closer look at hedge funds like Gates Capital in order to identify their best and worst ideas.

Gates Capital Management’s equity portfolio was valued around $1.81 billion at the end of December 2018, which is down by 54% from the previous quarter when its portfolio carried a value of $3.94 billion. Among its top ten positions was Altaba Inc. (NASDAQ:AABA), a company with a market cap of $42.537 billion and one of the 30 Most Popular Stocks Among Hedge Funds. This is a non-diversified, closed-end management investment company with headquarters in NYC; it was formerly known as Yahoo! Inc, and it was built upon Verizon’s acquisition of Yahoo! Inc.’s Internet business.  Over the last six months, Altaba’s stock gained 16.74%, and on March 1st It had a closing price of $74.96. Gates Capital Management had a position in the company that was worth around $93.03 million, on the account of 1.61 million shares. More about the fund’s biggest holdings and most important investments from the fourth quarter of 2018, you can find out on the next page.