The Ideas Report For Serious Investors

We are pleased to bring our subscribers a special edition of Downside Protection Report, featuring an exclusive interview with up-and-coming value fund manager H. Kevin Byun, founder and managing partner of Denali Investors LLC.

Investment funds managed by Byun generated a gross return of +28% for the full year and +43% for the fourth quarter of 2008.

Denali employs a strategy of investing in special situations, including spin-offs and other major corporate events. As a result, Denali’s performance has been relatively uncorrelated to that of the broader stock market, with outperformance generated through the careful selection of special situations.

Q: Your fund was up 43% in Q4 and 28% for the full year 2008. Are these gross or net figures?

A: The year end figure is the gross return. The performance fee is determined at the end of the year. It’s the 1950s Buffett Partnership structure of 25 net 6, meaning no performance fee until a 6% hurdle with one quarter of performance above that.

Q: Can you tell us what drove your performance in Q4? Was your fund net short?

A: The fund has a handful of short positions but was net long the whole year. Also, the fund was majority cash the whole year until Q4. I had a healthy respect for what I considered to be upcoming dislocations. So I waited. Then the landscape totally changed in Q4. The fund shifted from majority cash to almost fully invested. There were a number of air tight self-tender offers with high yields that came up one after the other. There were a number of grossly mispriced spin-offs. There were a number of grossly mispriced merger situations. All the new special situation investments had life cycles within the quarter.

Q: How are you positioned differently today than you were in Q4? What is your view on the major traps awaiting equity investors over the next twelve months?

A: [...]