Swift Run Capital Management Slashes Portfolio As Picks Lose 2.3% in Second Quarter

The stock picks of Swift Run Capital Management, a hedge fund managed by Tim Mullen, didn’t have a good run in the second quarter ended June 30 based on our calculations, which may be what compelled the diversified investor to significantly trim its portfolio. Our data shows that Swift Run’s stock picks as of March 31 in companies with a $1 billion market cap lost 2.3% during the second quarter. The return percentage is based on the weighted average returns of the 55 qualifying stocks in which the fund had a long position in as of March 31. Year-to-date, Swift Run’s picks are up by 1.1% using the same methodology to calculate its first quarter returns. At the end of the second quarter, the hedge fund had a public equity portfolio value of $168.04 million, 26.74% less than its portfolio value at the end of the first quarter of 2015. The second quarter saw the fund reduce its holdings in 30 stocks and completely sell out of two stocks. In this article, we consider three of its top stock picks, namely, Colony Capital Inc (NYSE:CLNY), Howard Hughes Corp (NYSE:HHC), and NorthStar Asset Management Group Inc (NYSE:NSAM); all of which posted negative returns for the second quarter.

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Why do we pay attention to hedge fund sentiment? Most investors ignore hedge funds’ moves because as a group their average net returns trailed the market since 2008 by a large margin. Unfortunately, most investors don’t realize that hedge funds are hedged and they also charge an arm and a leg, so they are likely to underperform the market in a bull market. We ignore their short positions and by imitating hedge funds’ stock picks independently, we don’t have to pay them a dime. Our research have shown that hedge funds’ long stock picks generate strong risk adjusted returns. For instance the 15 most popular small-cap stocks outperformed the S&P 500 Index by an average of 95 basis points per month in our back-tests spanning the 1999-2012 period. We have been tracking the performance of these stocks in real-time since the end of August 2012. After all, things change and we need to verify that back-test results aren’t just a statistical fluke. We weren’t proven wrong. These 15 stocks managed to return more than 139% over the last 34 months and outperformed the S&P 500 Index by 81 percentage points (see the details here).

While Colony Capital Inc (NYSE:CLNY) still remained Swift Run’s biggest holding at the end of the quarter, the fund reduced its position in the stock by 40.16% to 462,849 shares valued at $10.48 million, and representing 6.24% of its total portfolio. This stock was among the holdings that burned its returns during the quarter, featuring an equity loss of 11.2%. Colony Capital Inc, an international investment company based in Santa Monica, California, has been cited as a good investment among fairly-priced stocks, having delivered a dividend yield of 5.68% for the second quarter of 2015. The company’s combination with Colony Capital, LLC, made it an internally managed REIT, a step that has made it attractive with many investors as it cushions them from any external management fees.

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A total of 38 hedge funds from our database held long positions in Colony Capital Inc (NYSE:CLNY), with their aggregate investment valued at $993.31 million. Although the investment value increased, the total number of hedge funds with long positions remained the same. EJF Capital, managed by Emanuel J. Friedman, was the biggest shareholder among those with 10.20 million shares, representing 9.1% of its equity portfolio. Brian Jackelow’s SAB Capital Management came in second with 5.30 million shares, having reduced its position by 13.0%. The stock represented 13.42% of its total equity holdings going into the second quarter. Other notable funds that were bullish on the stock going into the second quarter were Kieran Goodwin’s Panning Capital Management, and Andrew Feldstein and Stephen Siderow’s Blue Mountain Capital.

Swift Capital’s second-biggest holding at the end of the second quarter was in Howard Hughes Corp (NYSE:HHC) in which the fund held a total of 70,858 shares with a market value of $10.17 million, having reduced its stake in the stock by 3,420 shares. The stock represents 6.05% of its total portfolio holdings. Howard Hughes Corp (NYSE:HHC) also performed dismally during the second quarter, posting a 7.4% loss. The Dallas, Texas-based real estate company just received an approval by the Hawaii Community Development Authority for the construction of affordable condominium tower in the Kakaako area. The structures are strictly for-sale, according to the approval documents. This is believed to be a major boost to the company’s financial future, although no definite timeframes have been issued. From our database, 30 hedge funds were long on the stock going into the second quarter with their total investment valued at $1.87 billion, higher than the value at the end of the fourth quarter of 2014, although the number of hedge funds long in the stock stood at 31. Of the hedge funds we tracked during the first quarter, Murray Stahl‘s Horizon Asset Management emerged as the biggest shareholder with 4.82 million shares after trimming its position by 7%. This represented 10.29% of its total portfolio holdings. Another notable shareholder was billionaire Bill Ackman’s Pershing Square, with 3.57 million shares.

At the end of the second quarter, Swift Run had reduced its stake in NorthStar Asset Management Group Inc (NYSE:NSAM) by 44.14% to 288,039 shares valued at $5.33 million. The losing trend also hit this stock, which went down by a whopping 20.4% during the quarter. The company has posted remarkable earnings per share growth of 32.0% over the last five years and a year-over-year earnings growth of 375%. The global asset management company’s performance in the second quarter was, however, a disappointment to investors. NorthStar Asset Management Group Inc (NYSE:NSAM) has dropped by about 3.23% over the past year. The company recently announced 4.625% senior stock-settlable notes with an aggregate price of $300 million, which are due at the end of 2016. In spite of the recent lethargic performance, there are hedge funds that have remained bullish on the stock. Robert Pitts‘ Steadfast Capital Management is one such investor. The fund walked into the second quarter with 14.44 million shares of the stock after slightly raising its position during the first quarter. The stock represents 4.7% of its total portfolio holdings. MSDC Management, managed by Marc Lisker, Glenn Fuhrman, and John Phelan, went into the second quarter with 7.84 million shares, while Eric Mindich of Eton Park Capital held 6.67 million shares.

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