• Problem

    • The economic expansion is 93 months old. The average economic expansion has lasted 47 months.

    • The current expansion is the third longest in the last 100 years.

    • Long only active and passive strategies are at risk as the cycle turns.

  • Solution

    • Wolf Hill managed accounts offers exposure to our proven process of finding uncorrelated asymmetric opportunities across the capital structure. Our strategy provides ballast to a portfolio in uncertain times, such as an expansion that is near unprecedented levels.

    • Given the position in the cycle, Wolf Hill will put additional focus on playing defense.

    • Our ability to invest across the capital structure offers a broader opportunity set. In the current environment, this entails investing in secured debt, mature, cash-flowing businesses with discounted valuations, and seeking asymmetric credit shorts in companies with high operating and financial leverage.

EARLY CYCLE

MID CYCLE

LATE CYCLE

ECONOMIC INDICATORS

Wide credit spreads, high default rates, macro and geopolitical risks

Moderating defaults, persistent gains in job creation, increasing global GDP estimates

Tight credit spreads, expectations of higher default rates, peak employment, relaxed credit underwriting standards

PORTFOLIO POSITIONING

Gradually increase net long exposure, levered equities, cyclical mean-reversion trades,
capital structure arbitrage

Long high yield corporates,
long/short select equities

Cash, secured debt, mature,
cash-flowing businesses with
cheap valuations, asymmetric
credit shorts

INVESTMENT STRATEGY

Look for cheap optionality to an eventual cyclical recovery.
Short companies that are reliant on capital markets access

Maintain exposure to cyclical companies emerging from Chapter 11. Anticipate tighter credit spreads

Play defense, target companies
with high operating and financial
leverage as potential shorts

  • Problem

    • Active asset managers are incentivized to mimic their benchmark in order to grow assets. Charging a management fee for index hugging (and the resulting underperformance) is a prime culprit behind the shift to passive investing.

    • “Worldly wisdom teaches that it is better for reputation to fail conventionally than to succeed unconventionally.” - John Maynard Keynes

  • Solution​

    • Wolf Hill was created as a vehicle to compound our wealth.​

    • Clients will invest alongside us, aligning interests.

    • We seek to compound capital over rolling three year periods. Returns are our sole focus.

    • We believe our experience, focus, and patience presents us with the opportunity execute our time tested process. 

PORTFOLIO CONSTRUCTION

LONG IDEAS

Typically more conservative
Designed to generate current income for the portfolio and to provide ballast against
the expected volatility of other, more volatile securities


Examples:

  • REITS

  • Master Limited Partnerships (“MLPs”)

  • High yield corporates

  • Mature, cash-flowing businesses, e.g.,

    • “Compounders”

    • Funeral home businesses, theme parks

  • Underwritten with expectation of >20% total return potential

LONG IDEAS

Securities trading well below our
estimate of intrinsic value due to factors we deem to be temporary in nature

 

 


Examples:
• Distressed debt
• Operational turnarounds
• Cyclical recovery plays
• Levered equity stubs


Underwritten with expectation of
> 100% total return potential

SHORT IDEAS

Securities trading well above intrinsic
value due to factors we deem to be
unsustainable

 

 


Examples:
• Select high yield corporate debt
• Companies enjoying periods of peak
earnings we expect to mean-revert
• Companies being valued on the
basis of hype and unrealistic
expectations re: market share
dominance or size of total
addressable market


Underwritten with expectation of
> 30% total return potential

  • Problem

    • Investors (and fund managers) chase performance.

    • Peter Lynch generated an average annual return of 29% in the Magellan fund from 1977-1990. However, the average investor in the fund actually lost money.

    • Chasing performance is one of the reasons most investors never experience the returns they expect (and deserve).

  • Solution

    • Wolf Hill seeks to generate 2x the return of the S&P 500 in up markets, and 1/2 of the downside over rolling three year periods with low correlations to traditional asset classes in all market environments.

PORTFOLIO PROFILE

PORTFOLIO CONCENTRATION
• High conviction and concentrated
• Top 10 positions: 70 – 100% of capital
• 10 – 15 longs, 5 – 10 shorts

EXPOSURE
• Typically long-biased, but will tactically adjust net exposure
• Overall exposure determined on a bottom-up basis

SOURCES OF PORTFOLIO DIVERSIFICATION
• Industry, sector and sub-sector
• Idea bucket (thematic, deep value, event)
• Capital structure focus: debt v equity
• Implicit macro themes
• Market capitalization – run the gamut
• Holding period – tactical trades versus longer term
investments


TURNOVER
• Aim for annual portfolio turnover of approx. 1x/year to
enhance tax efficiency
• Seek to harvest investment losses near year-end to maximize after-tax returns

  • Problem

    • Low interest rates have decimated portfolio yields

    • Record low (and in some cases negative) interest rates have caused savers to pursue yield investments without regard to valuations.

    • Lofty valuations and crowded positioning in yield instruments has created a situation where increasing rates can cause outsized losses.

  • Solution

    • Wolf Hill offers portfolio construction expertise that is designed to generate current income from mispriced REITs, MLPs, high yield corporates, and mature, cash flowing businesses.

    • We then seek to short securities that have been incorrectly lifted by the tide of yield seeking investors in a low interest rate world. This includes asymmetric situations in high yield corporate debt of companies with peak earnings and valuations based on unrealistic market expectations.

Wolf Hill Capital strives to compound our client capital over time using our proven investment strategy of buying out-of-favor, cyclical assets and selling short securities whose challenged business prospects offer asymmetric returns.

BUSINESS MODEL

LONG INVESTMENT CHARACTERISTICS

  • Straightforward business models with favorable medium-term industry dynamics

  • Competitive moat

  • Oligopoly industry structures that provide pricing shield

SHORT INVESTMENT CHARACTERISTICS

  • “Melting ice-cube” business models with unsustainable financial and operational leverage

  • Step-down in growth algorithm

  • Industries experiencing peak earnings with low barriers to entry

MANAGEMENT

CATALYST

  • Track record of shareholder value creation

  • Margin enhancement opportunities

  • Transparent and accessible

  • Overly promotional “empire builders”

  • C-suite turnover

  • Misalignment of interests

  • Overly pessimistic expectations

  • Cyclical inflection points

  • Emerging pricing power

  • Debt restructuring (in/out of court)

  • Hidden asset value

CAPITAL STRUCTURE

  • Overly optimistic expectations

  • Penetration curves hit saturation

  • High returns attract new entrants

  • Hostile political or regulatory environment

  • “Cockroach theory” (there is never just one cockroach…)

  • Most shorts will be in individual stocks

  • Select high yield bonds with very asymmetric return profiles

  • The entire capital structure including common stock, preferred stock, convertible bonds, unsecured bonds, and secured debt

  • Problem

    • Asset managers pay little attention to after tax returns.

    • However, after tax returns are of paramount importance if one wants to compound wealth over the long term.

    • Using a theoretical 10% annual returns, an investor paying long term capital gains would have $1,177,891 at the end of 20 years. An investor paying short term capital gains would only have $761,842.

  • Solution

    • As Wolf Hill was founded to compound our personal wealth, we seek to maximize tax efficiency.

    • Wolf Hill aims to have annual portfolio turnover that enhances tax efficiency. Our annual portfolio turnover target is 1x/year. We will seek to harvest any losses to maximize after tax returns.

  • Problem

    • Benchmarks create investment constraints

    • The 2008 bear market caused share declines in strategies constrained to invest in stocks

    • Strategy constraints limit managers flexibility to protect from bear market risks.

  • Solution

    • Wolf Hill’s absolute return strategy allows us to seek positive returns over market cycles.

    • We believe our unconstrained portfolio strategy allows us to enhance returns while reducing risk.

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  • Problem

    • Diversification is worthless in times of crisis when everything becomes 100% correlated. 

    • Global markets are more interconnected than they have ever been before. US multinational corporations are driven by emerging market economies, and increasing political uncertainty presents out sized portfolio risks. Additionally, the speed with which information spreads drives the interconnection of global markets.

  • Solution

    • Wolf Hill’s deep fundamental research process drives a value driven framework that unearths uncorrelated catalyst specific situations. We believe this creates a safety net that provides ballast in periods of global crisis.  

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  • Problem

    • The traditional hedge fund fee structure eats away at investor returns.  

    • A 10% gross return nets an investor 4.39% after management fees, administration expenses, commissions, and incentive fees are taken into account

  • Solution

    • Wolf Hill was created to compound our wealth over the long term.

    • As such, we eliminate all fees that erode our long term compounding potential.

    • Investors interests are aligned with ours.