Quitting the Hedge Fund Game

This I can understand:

For some, the volatile market has been too much. Such is the case for Mark Sellers, who runs a small energy fund Sellers Capital.
After posting eye-popping returns of 65 percent in the first half of the year, the 40-year-old Sellers alerted investors last month he was closing shop and retiring from the profession.
"I truly love the art of investing, but managing people's money has taken a large toll on my demeanor and psyche," Sellers said in a letter obtained by The Post. "I feel downright miserable."

Managing a hedge fund is a high-stress activity at the best of times. And given the quantum leap in stress that all hedge-fund managers have experienced in recent weeks, it's hardly surprising that at least one energy hedge-fund manager has decided to call it quits.

The next sentence, however, makes less sense to me:

Sellers, who put a lock on redemptions, plans to liquidate the fund over the next year or two.

The only reason to spend a year or two liquidating your fund is if it has very illiquid investments. I'm not sure that the NYP's characterization of Sellers Capital as an "energy fund" is correct, but if it is, then energy investments are nearly always very liquid.

I suspect that in reality Sellers Capital has lost a lot of money in the second half of this year, and he's decided to hold and pray rather than liquidate at a loss. Here's a Sellers Capital presentation from May. It says that the fund likes to "make big bets", and it says that its guiding philosophy is Warren Buffett's: "Rule #1: Don't lose money. Rule #2: see Rule #1".

I do believe Mark Sellers when he says that he feels downright miserable. But I think the reason is simple: he violated his Rule #1. And, for that matter, his Rule #2.

"We buy two types of companies," says the presentation. The first type is out-of-favor large-caps: it cites Johnson & Johnson, Wrigley, and Pepsico. Wrigley had already been bought at the time of the presentation; the other two companies are down about 17% since the beginning of May.

Most of the presentation is about an example of the other kind of company Sellers likes: small-caps selling near liquidation value. He picked Vulcan Materials, which was selling at $70 per share. If he was unlucky, he said, VMC would go to $60. Most likely, it would go to $90. If he was lucky, it would go to $105.

Within two months, VMC was at $50. It then rebounded, but it still closed today at $54.50.

Elsewhere online, TickerSpy has a list of what it says are Sellers Capital's holdings, which include VMC and which generally look like a pretty standard value-investor portfolio. (Berkshire Hathaway, UPS, American Express, that kind of thing.) Over the past six months, one of the 15 stocks is up: FX Energy. The rest are down, with Premier Exhibitions doing particularly badly, off 77%.

Now I'm not saying that the hold-and-pray decision was the wrong one to take. Investors in hedge funds have a lot of money, they don't need to liquidate now. So if you're holding companies which are worth more than anybody's willing to pay right now, it makes sense to unwind slowly, rather than throwing up your hands and taking large losses.

But I do think that Sellers is underwater. It's clearly not a position he's used to, and not one he likes, either.