Member Spotlight – Bunkport Partners
Investor behavior has remained consistent for more than 100 years. Investors still overreact to bad news and underreact to good news. They also continue to sell their winners too quickly, while holding on to their losers for too long.
What has changed significantly is the fabric of the equity markets. JP Morgan estimates that algorithms now provide as much as 80% of the market making activity. As market volatility rises, the algorithms tend to step away and market depth declines exponentially, exacerbating price moves to the downside.
What also has changed is the riskiness of passive investing, which has exploded in popularity. The S&P 500 is a market capitalization weighted index, and the top 5 companies now account for 22% of the index. The top 10 companies in the index are the same weighting as bottom 350 names combined. This concentration is even more pronounced in the Nasdaq 100, where the top 5 companies account for 46% of the index.
These equity market dynamics have significantly increased the risk associated with buy and hold passive index investing, and there continues to be elevated risk for overshoots to the downside much like in February 2018, October 2018, and March 2020.
“There’s a fragility in the marketplace that came with the new structure of liquidity, with electronic market-making, computers, and the growth in passive investing,” – Marko Kolanovic, Head of Quantitative and Derivative Research at JP Morgan, March 2019.
Avoiding these large, and now more frequent market drawdowns can result in significant outperformance for an investment manager. In fact, by simply missing the 20 worst days in the S&P 500 over the past 10 years, the annualized return increases from 8.3% to 18.8%. This statistic is likely to become even more pronounced in the years ahead.
The Bunkport Partners fund is a US equity focused opportunistic hedge fund. The strategy also navigates around many of the weaknesses of passively investing in the equity market.
The strategy is built around 3 core principles:
- There are times to be invested in the equity market and there are times to step aside and preserve capital.
- When invested in the equity market, a concentrated portfolio of the strongest stocks can generate superior performance.
- Machines are wonderful tools to screen for opportunities and run analysis, but an investment portfolio is best managed by an experienced portfolio manager.
The investment team utilizes internally developed quantitative models to determine when it is safe to be invested the equity markets, and if so, what stocks to purchase. The strategy allows investors to meaningfully participate in the equity markets, while also avoiding the severe and prolonged equity market drawdowns.
Bunkport’s goal is to generate private equity type returns in a highly liquid public market vehicle. The investment objective is to generate a 20% annual net return target with low correlation to the major equity markets or any specific investment style. Historically, the fund has exceeded this return objective with a correlation to the S&P 500 index of just 0.14.
A value proposition has again emerged as Bunkport has decided to reopen their founders class shares for a limited $10mm total amount. This investor class participates in the management and incentive fees of the investment manager thus driving down their net fees as the fund grows. When the fund reaches $200mm in AUM, the founders class net fees will be zero.
The two founding partners of the firm have a combined 45 years of institutional portfolio management experience and financial markets expertise. The investment manager, Bunkport Capital is scheduled to host a FON webinar in early December.