Eden Alpha, the long/short value hedge fund managed by Nathanael Dreyfuss, Assaf Nathan and Yaniv Uliel according to the principles set out by Benjamin Graham had a fairly subdued 2016. In comparison to the fund’s prior year’s, 2016’s returns are poor as the fund only generated a net return of 8.5% according to Eden Alpha’s full-year letter, a copy of which has been reviewed by ValueWalk. The fund was hurt in part by undisclosed shorts and plans to pare back shortsales in the future, according to the memo. The letter reasons as follows:

Holding short positions is more of a hedge-fund marketing gimmick rather than an approach that can sustainably create value

Some short-sellers would disagree but the sentence is interesting.

For 2015 the fund returned 21.8% net, 3.6% in 2014, 41.9% in 2013 and 22% in 2012 for a cumulative return since inception of 136.9% net (191.2% gross). Over the same period, the S&P 500 total return index gained 98.2%.

Value Fund Eden Alpha Grows 40-Fold In Five Years

Eden Alpha has been open to investors for five years, and during that period the fund’s assets under management have grown from a minute $600,000 of the beginning of 2012 to $23 million today a 40-fold increase.

With a 40 fold increase in assets since inception and an impressive record of outperformance, the managers of Eden Alpha are understandably excited for the future. At the end of 2016, the fund was 83% long and 10% short with two special situations. The top five positions made up 39% of the partnership’s assets.

During 2016, a large amount of the partnership’s returns came from two spin-offs Horizon Global and AdvanSix. The hedge fund states:

Advan was spun off from Honeywell and includes the larger group’s fertilizer and chemical intermediates division. Following the spin, the size of Advan meant there were plenty of forced sellers in the market, and the shares slumped 30% after completion. Eden Alpha took this opportunity to buy.

The letter states:

Horizon Global is a terrific example that shows how value can be very rapidly unlocked through a spinoff. Once the company received adequate managerial attention, better capital allocation and proper management of the organizational resources the value could be easily unlocked. As easy as it may seem, these conditions often cannot exist in a big company where decision-making is slow, organizational politics often trump rational capital allocation and a myriad of other reasons makes this process almost impossible to happen inside a big company. With barely any growth in sales, Horizon’s management generated tremendous value just by doing what they always thought should be done, but couldn’t do it as a part of a big corporation.

With regards to Advan, Honeywell notes:

Honeywell tried to sell that business for $1 billion and that AdvanSix is the lowest-cost producer of most of its products, the forced selling took place and the price of AdvanSix shares, shortly after their debut, went down. When one side is willing to sell at almost any price, the person on the other side of the transaction usually finds a good bargain, and there we were. Shortly after the spinoff took place, the shares lost almost 30% of their value and we took advantage of this situation and purchased the shares after the volume analysis that we did showed us that most forced selling already occurred. We didn’t have to wait long and we sold the holding for a nice profit as we had predicted.

And the team is expecting more such opportunities in 2017 as Donald Trump takes office:

“Unfortunately, these situations don’t show themselves all too often and sometimes, when they do, they are not priced attractively. That said, we are on the lookout for a few patterns of inefficiencies that we think can generate attractive returns, and if they come on our way, we will take a swing. It can happen a few times a year and sometimes it might not happen at all. We hope that in 2017 the former will be the case.”

“While the situation in China isn’t getting prettier, all eyes will be on the US in the early part of 2017 as Donald Trump takes office. Mr. Trump has spread many promises for deregulation, tax reductions and heavy infrastructure investments. If he lives to even some of these expectations then good news may lie ahead. The UK will (most likely) commence the separation process with the Eurozone and elections will take place in France, The Netherlands and Germany. If you thought that 2016 was interesting, then sit tight and see what 2017 has in store. 

If history is any guide, we should get opportunities to act during this year when the market will find a reason to be irrationally afraid of one thing or another. Our watchlist contains many names of businesses that we liked and thoroughly researched but did not reach a price level that we consider attractive. Once they do, we will not hesitate to act boldly and deploy our capital at opportunities that we like at prices that enable us to generate good returns.”