Alphyn Capital Management 2Q19 Commentary: Long These Small Cap Compunders

Alphyn Capital Management's letter to investors for the second quarter ended June 30, 2019.

Q2 hedge fund letters, conference, scoops etc

Performance

The model portfolio returned 18.96% gross year to date. As of June 30th, 2019 the top ten positions comprised 77% of the portfolio, and the portfolio held 10.5% in cash. The market experienced some volatility in May, and there is continual chatter in the news on rates, economic cycles, and trade wars, so I felt it would be helpful briefly to discuss my view on market volatility in general, and how one might approach investing in an uncertain environment.

Balancing a realistic long term view on volatility with careful management of the portfolio

In my first letter, I wrote about the advantages of investing for the long haul, and participating in the immense wealth generating attributes of the stock market. Nevertheless, the inevitable exposure to frequent and steep drawdowns bears discussion.

Dr. Robert Frey, who was previously a Managing Director at Renaissance Technologies, the most successful hedge fund of all time, where he was a member of the management committee that oversaw the development and management of the Meritage Fund, Renaissance’s internal fund of hedge funds, gave a presentation titled “180 years of stock market drawdowns.”

A few of his key insights are:

1. It is important to zoom out and consider a long term horizon to better understand the character of an asset class such as stocks
2. The overall character of the stock market has not changed much over 180 years
3. Extreme volatility is normal, and events such as the Great Depression are not outliers
4. One spends 75% of the time in a drawdown and over half the time in a major drawdown

Source: Dr Robert Frey, 180 years of market drawdowns

Another presentation “What Other Industries Teach Us About Investing” 2, by Morgan Housel is particularly illustrative.