STI Hedge Fund August Performance

The greatest danger to hedge fund performance is forced liquidation. Most funds liquidate securities from time to time that the operator decides no longer fits the criteria for the fund. But forced liquidation is death to profit performance since the fund is generally taking losses selling securities prior to when the operator believes is prudent.

 

Forced liquidation is caused by two events, one is when holders of shares in the fund demand cash for their shares or the fund over levers the capital margins of the fund. Of course giving cash to shareholders means selling securities since most hedge funds are just that HEDGE funds where they hold little cash. When funds over lever, or hold securities in the downward trending market, they can reach margin requirements quickly and can be forced to liquidate to satisfy account or SEC rules.

 

In the past month with the downward trajectory of the markets many hedge funds have had to liquidate for both of the reasons noted above. It has been brutal in some cases. STI Hedge Fund has not liquidated a single position during the past month and does not see any forced liquidation situations going forward. One, because we are privately owned by one person and two because of the structure of the fund.  Due to the onerous regulatory environment and fiscal uncertainty brought on by the current administration  I do not see in the near future any reason to go public and take on investors, even though I would highly consider doing so if those regulations and uncertainty were rescinded.  Also the structure of the fund is such that we invest in securities or use derivatives with certain criteria that are positioned for a cash flow approach to avoid forced liquidation due to loss of value. We do not see any scenario currently where we would ever be forced to liquidate until we consider a security not fitting our criteria.  One last point here is that with our scenario we produce steady market beating returns of 15% to 18% annually instead of the wild swings of  single digit returns to 20% plus. During August the average hedge fund lost 4.1% or 48% annualized loss.

 

The STI Hedge Fund reports a positive cash flow for August. We had a 11.86% annualized return for the month. This is below our goal, but frankly we could not be happier to actually go forward in cash for the month after the horrible market month.  A large gain from tobacco trading was the highlight of the month.  We are carrying a significant carry forward loss into September, but as noted above our structure allows us to wait on recovery of capital declines until a later date. In addition the majority of our holdings are down less than a day's trading value so we are poised for a recovery in fund value if market conditions improve. The action during August has confirmed that our security selection process and cash flow approach.

 

Looking forward to September the fund has good trading opportunities open for profit as we only had to use a few far forward options last month despite the lower pricing of the market. The fund will also benefit from the lower trading expenses we negotiated last month. I am also pleased that the structure of the fund will actually produce cash flow from margin that will be positive next month.  Unless the market collapses STI Hedge Fund should continue to produce positive cash flow and market beating returns going forward.  We will avoid being smug about our performance when other hedge funds stunk it up during August.