Based on our metric for measuring hedge fund performance, during the second quarter Alexander Medina Seaver‘s Stadium Capital Management posted returns of over 31%, ranking it as the second-best performing fund in our database during the period. The methodology is based on weighted average returns of the fund’s equity holdings on March 31 in U.S securities that exceeded a market cap of $1.0 billion. The largest outperformance came from Builders FirstSource, Inc. (NASDAQ:BLDR), which rose by more than 80% during the second quarter. The other top picks of the fund included Ascena Retail Group Inc (NASDAQ:ASNA) and Insperity Inc (NYSE:NSP). A discussion of their performances can be found below.
Stadium Capital is an activist fund that engages with the management of its target companies to create more shareholder value from the company’s operations. The firm was established in 1997 by Seaver who has a BA in economics from Harvard and an MBA from Stanford University. The market value of the fund’s public equity portfolio stood at $382.59 million at the end of March and the portfolio was fairly concentrated, with its top three picks representing more than 60% of its value.
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Following activist funds like Stadium Capital is important because it is a very specific and focused strategy in which the investor doesn’t have to wait for catalysts to realize gains in the holding. A fund like Seaver’s can simply create its own catalysts by pushing for them through negotiations with the company’s management and directors. In recent years, the average returns of activists’ hedge funds has been much higher than the returns of an average hedge fund. Furthermore, we believe do-it-yourself investors have an advantage over activist hedge fund investors because they don’t have to pay 2% of their assets and 20% of their gains every year to compensate hedge fund managers. We have found through extensive research that the top small-cap picks of hedge funds are also capable of generating high returns and built a system around this premise. In the 34 months since our small-cap strategy was launched it has returned over 135% and beaten the S&P 500 ETF (SPY) by more than 80 percentage points (read more details). Soon, we’ll be releasing a new quarterly newsletter written by former activist hedge fund analyst Michael Bland that tracks ten or so activist campaigns at any given time.
After a surge in Builders FirstSource, Inc. (NASDAQ:BLDR)’s stock price following the $1.63 billion acquisition of privately-held ProBuild in April, Stadium sold about 2.55 million shares of the company to lower its total stake to 9.60 million shares. The holding still amasses about 9.8% of the company’s outstanding shares. After Stadium Capital, Phil Gross and Robert Atchinson’s Adage Capital Management is the largest stockholder of Builders FirstSource, Inc. (NASDAQ:BLDR), owning some 1.72 million shares valued at $11.49 million as of the end of March.