market folly

We've been awaiting various first quarter 2010 letters from hedge funds and various other managers as some of them are slowly starting to trickle in. So today, we wanted to share with you H. Kevin Byun's latest letter from Denali Investors. Since inception, Denali is up 62.5% compared to -20.1% for the S&P 500. For March, Denali was up 3.0%, lagging the S&P. You can check out how their performance stacks up against other managers in our round-up of 2010 hedge fund performance numbers. And as always, you can check in on our coverage of hedge fund letters here.

Right off the bat in his letter, Byun makes a very good point that by and large, at least some of this never-ending rally in stocks can be attributed to performance chasing as many funds struggle to cope with their highwater marks and try to recoup fees where they can. As he writes, "And so career risk, business risk, and behavioral finance, rather than the best interests of their investors, comes to the fore." He hopes that many fund managers aren't simply wishing for a full recovery of assets, but that very well may be the case here.

Turning to Denali's portfolio, we see that they are eyeing opportunities in spin-offs and corporate liquidations. Byun made a fantastic point that Warren Buffett was able to outperform even in market declines due to his special situation investments. As such, Byun likes to have a few positions that fit this mold and have solid risk/reward profiles.

Embedded below is Denali Investors first quarter 2010 letter to investors:



You can download a .pdf here.

More than anything, this letter is a good look into a methodical framework for a value oriented investment strategy. While he doesn't specifically name fund positions, we still found the letter intriguing. If you have access to any hedge fund investor letters, we'd love to hear from you as we're always looking to share resources anonymously as your privacy is our top concern. Send us a message.

And in the mean time, you can sort through previous hedge fund letters we've posted.