Looking back on one whale of a prediction by Saba

By Andrew Kleinberg

Tue Feb 5, 2013

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Absolute Return also revisits Balestra's exploding assets.


One year ago

>> Bill Ackman, Boaz Weinstein and other hedge fund managers presented their stock picks at the Harbor Investment Conference in New York. Ackman's suggestions were mixed (Business Insider has a full accounting here), while Weinstein's suggestion later became famous as the so-called Whale Trade (see below).

But both press darlings were outclassed by the less-well-known Howard Shainker, cofounder of Bow Street Partners. His selected stocks, Rentech (RTK) and Rentech Nitrogen Partners (RNF), are up a respective 101% and 71% since he advocated them on February 3, 2012. His thesis relied on the increasing demand for the use of nitrogen fertilizer and the company's lackluster valuation relative to its industry peers.

Bow Street, which was seeded by the Blackstone Group, is up 11.5% in 2012, according to a source close to the company, which was accomplished with a low net exposure averaging in the 30's. The firm's assets are up to around $130 million, the source said.

Shainker, a former Third Point analyst, teamed up with his Harvard Business School friend Akiva Katz to form Bow Street in 2011. Katz told Absolute Return that he sees a lot of opportunity for the event-driven fund in 2013. "The levels of cash on corporate balance sheets are pretty high and top line growth is slowing leading to a pretty healthy environment for M&A this year."

>> Bob Simonds signed on as General Counsel and Chief Compliance Officer at Boaz Weinstein's Saba Capital. Saba, formed in 2009, had quickly grown to 40 employees and $5 billion in assets.

Several days after the announcement of Simonds' hiring, Weinstein would go on to recommend the soon-to-be-famous "London whale trade" at the aforementioned Harbor Investment Conference, which profited amid devastating losses for J.P. Morgan less than three months later.

Despite the prescient and now well known investment recommendation, and the accolades that followed, the trade did not do much for the performance of Weinstein's the flagship fund in 2012.

Saba's flagship fell 3.87% in 2012 versus a 10.07% return for the Absolute Return Credit Index. The firm managed $5.1 billion as of Jan 1, 2013.

Five years ago

>> James Melcher's Balestra Capital Partners was up 9.7% in January 2008, continuing an astonishing 2007 run wherein the firm's flagship macro fund rose nearly 200%--primarily from shorting subprime mortgages. Melcher's continued pessimistic positioning in 2008 would lead the fund to a 45.8% gain that year on assets of $450 million at the time.

Since then the ride has not been so sweet, as Melcher's gloomy outlook lead to negative returns during a very bullish period for markets as a whole. His fund is down a cumulative 3.61% from January 1, 2009 through December 31, 2012 compared with a gain of 20.64% for the Absolute Return Macro Index and a 60%+ return for the S&P 500.

Investors appear to have shrugged off Balestra's minor losses as a small price to pay for tail risk; the firm managed $2.2 billion as of July 1, 2012.