market folly

Perry Capital is out with their second quarter letter and in it we see some intriguing portfolio news. Perry Partners International exited their entire equity position in Citigroup (C) in the second quarter. While they still think it is an "interesting leveraged play on worldwide economic recovery", Perry feels they had to take the position off due to price appreciation and renewed concerns regarding financial reform, among other things. This news becomes all the more interesting when you consider that Dan Loeb's hedge fund Third Point sold out of Citigroup in the first quarter. At the same time, Bill Ackman's hedge fund Pershing Square started a new stake in Citi. Such a divergence of prominent minds is what makes a market.

Perry ended the second quarter up 1.87% and is up 9.08% net year to date versus a -11.4% performance for the S&P 500. Some of their largest winning positions on the quarter included short European exposure, as well as investments in Chrysler and Barneys. In the second quarter, Perry also reduced their structured credit investment as "prices reached levels where forward yields were too low relative to risk to warrant maintaining these positions." They ratcheted their exposure down to only 3% of the portfolio from a peak of 14%.

One other portfolio maneuver worth highlighting is the fact that Perry Partners reduced risk in the portfolio as they are very concerned about the European banking system. The hedge fund ended the second quarter with 36% cash and cash equivalents. They will wait to deploy this when attractive opportunities arise in special situations in equity and credit.

In terms of portfolio exposure levels, we see that they are long equities to the tune of 23.94% and short equities by -15.39%, leaving them only 8.55% net long equities. This reaffirms what we've already seen from various data: hedge funds have below average net long equity positions. Perry's largest long exposure by far comes in corporate credit.

Perry also reveals that the majority of their hedges are "long volatility" positions, stakes that were obviously very beneficial to them during the market declines in May and June. While their hedge in Japan has not worked for them recently, they still feel the payoff profile is compelling.

Their letter ends by highlighting the extreme correlation in the markets. They note that such conditions are very difficult for typical hedge funds and they are placing an emphasis on nimbleness and portfolio positioning to guide them through. This echoes the same sentiment that market strategist Jeff Saut recently voiced when he said that risk adjusted stock selection was the key to navigating this correlated market.

Embedded below is Perry Partners International letter from the second quarter:



You can download a .PDF copy here.

We'll be posting up intriguing manager commentary as the Q2 letters continue to roll in, so be sure to stay up to date with our hedge fund portfolio tracking series.