Q&A: Maglan Capital’s CIO Talks Distressed Investing, Is Bullish On FairPoint Communications

Jun 10 2015 | 3:30pm ET

Concentrated positions generally equal risk. How do you hedge?

Risk is obviously pretty high on our radar. We always to try to figure out whether a position can be effectively hedged. And we don’t just rely on the financial markets – for instance, with Madalena, energy risk doesn’t need much active hedging, since the price it receives for production is locked and sector risk is already fairly well mitigated due to the sharp selloff.

When necessary, though, we hedge. For instance, in Madalena’s case, we’ve hedged against the Canadian dollar. We’re always trying to find good hedges that make sense. But at the same time, we’re cognizant that you can’t hedge things for long periods of time. It’s pretty hard to hedge off risk over 2-3 years, which is easily within our horizon – carry and borrow will kill returns. So we try to focus on what makes sense.

How does the macro environment fit in?

We’re mindful of what is around us on the macro side, since everything we’re looking at also fits into a larger picture. For instance, we expect interest rates will grind higher and energy prices will recover back near $75-$80 per barrel towards the end of this year or early next year, and we expect the equity markets to be constructive over the next 24 months, so we view all potential investments through that lens. We think the next couple of years will be a real stock pickers market. Bets on the right horses will work out pretty well – underfollowed, deep value situations will have the potential for significant capital gains.

Do you have targets in mind or wait until it seems tired?

It depends. For most of our positions, the target is always changing. We tweak our expectations based on what we see happening, data points, and what we think the fundamentals will be. Once we’re in a stock, and we see real execution, there really isn’t a set point at which we’ll sell. We’re pretty flexible once something is working.

Until that point, though, we’re always revaluating, scrubbing every data point. We’re nervous guys, always looking for what we’re missing. Why do we like a company when the market hates it? What does everyone else know that we don’t? As contrarians, understanding the opinion of the crowd is very important to us. Why is the herd moving the way it is? Is it smart to be moving the other way right now? We ask ourselves these questions every day.

We never get the timing perfect, but we try not to be too far off the ball. Sometimes something fundamental will change that alters our original thesis, and then we’ll sell. It happens. But the bottom line is that in our experience, if we’ve done our homework, chosen our positions correctly, and bring the requisite patience and discipline to bear, we can generate relatively uncorrelated, above-average, long-term alpha for our clients.

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