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York Capital's Letter to Investors

York Capital's Letter to Investors

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Published by DealBook
From DealBook: York Capital Management's year-end letter to investors
From DealBook: York Capital Management's year-end letter to investors

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Categories:Types, Business/Law
Published by: DealBook on Feb 07, 2009
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05/10/2014

 
 
York Capital Management – 4
th
Quarter, December 31, 2008 – Offshore
 
1
 
January 29, 2009Dear Investor,In the wake of the Lehman Brothers bankruptcy, the global financial and economic system broke down in a fashionnot seen in the developed world since the early 1930’s. Lending between financial institutions ceased as LIBORspreads spiked to unprecedented levels and the equity markets broke through their 2002 lows as the financialcrisis finally morphed into a significant economic downturn. Capital injections and the “ad hoc” restructuring of thefinancial services industry failed to halt the free fall of the markets in October and November. Against thisbackdrop, our portfolios continued to struggle as all risky assets were shunned by investors in an environment thatwas dominated by technical factors and fear. With the VIX at record levels, our large cash positions were our primary defense against the market down draft. While we did get a bounce off of the November 20
th
lows at theend of the year, our portfolios experienced modest declines in December as we marked our private book to reflectthe current economic environment.Historically, major market dislocations tend to expose “bad behavior” by market participants and this period wasclearly no exception; from Porsche’s market manipulation of VW stock, to the many hedge funds that inexplicablygated or suspended redemptions, and finally to Bernie Madoff’s epic fraud. All of these events combined for avolatile quarter and resulted in significant technical pressure on our industry. Notwithstanding these pressures, thefirm has met all of its redemption requests in full for all of its Funds. Below is a summary of estimatedperformance of the York Funds for the 4
th
quarter of 2008.
Performance¹
 As of December 31, 2008
 4
th
Quarter 2008 20083 Year (Annualized)Since Inception(Annualized)Multi-Strategy
(12.38)% (26.39)% (0.12)% 13.89%
Select
(22.59)% (41.57)% (6.25)% 14.86%
Credit Opportunities
(7.68)% (13.61)% 8.94% 18.46%
Global Value
(15.60)% (38.59)% (3.70)% 10.36%
European Opportunities
(23.65)% (26.66)% (2.07)% 6.54%
European Focus
(25.90)% (22.90)% N/A (4.38)%
Asian Opportunities
(9.01)% (29.40)% N/A 10.89%
Total Return
(15.48)% (28.63)% N/A (2.69)%
S&P 500
(21.95)% (37.00)% (8.36)% N/A
Barclays High Yield Index
(17.88)% (26.15)% (5.59)% N/A
MSCI Europe
(16.95)% (38.52)% (7.81)% N/A
MSCI Asia
(15.97)% (41.78)% N/A N/A
 
 
York Capital Management – 4
th
Quarter, December 31, 2008 – Offshore
 
2
 
The key question for investors is whether the
 
Fed’s reflation policy and the “Obama stimulus” will stop the currentdeflationary spiral and instill some measure of confidence in the American consumer, so as to end the “paradox of thrift” that has emerged since the Lehman collapse. If the stimulus is successful, the current market environmentwill be viewed as the buying opportunity of a lifetime as corporate bond spreads are at historically wide levels andmany companies are trading below their cash value. However, we will continue to position the portfoliosdefensively with relatively high cash positions and low net exposures as the stimulus is not certain to revive theeconomy.We do not expect to re-engage fully in the equity markets until we see signs of improving consumer confidence. An important indicator will be the rate of job loss change as job insecurity seems to be weighing most heavily onthe psyche of the U.S. consumer. With volatility still soaring, our approach in the equity book will be to emphasizeshort term, hard catalyst trades with stock specific risk rather than systematic risk. To the extent that we maintainlong term “value” positions, we will seek to take advantage of market volatility by trading around core positions. Inthe credit book, we remain focused on taking advantage of what will likely be a deep and prolonged distressedcycle that will present tremendous opportunities for investors who have the capital and fortitude to remain engaged.Below is a summary of discussions with our portfolio managers, highlighting current positioning and the opportunityset for 2009.
Credit
Despite maintaining relatively high cash positions and protection from a sizable CDS allocation, the credit bookstruggled during the quarter as any positions that we purchased prior to the credit crisis declined in value asspreads hit all time highs. Towards the end of the quarter, we were able to recover some of these losses by takingprofits in core bank debt positions where we thought the recovery was over done. We will likely add to these corepositions as we expect prices to return to pre-rally levels. Also, our private equity stakes in Chrysler and GMACwere marked down following the significant deterioration of the automotive sector.Our challenge in 2009 will be to balance our desire to buy distressed assets with our expectation that there arelikely to be future waves of forced selling from banks, hedge funds, CDO’s and CLO’s as the downgrade cycleescalates. For the early part of 2009, we expect our core themes of long first lien bank debt and short credit viaCDS to remain intact as corporate credits continue to implode. In the coming months, we will likely enter therestructuring phase of the corporate credit distressed cycle. We anticipate using a meaningful portion of our cashposition to increase our exposure to distressed corporates as weaker credits with limited access to capitalultimately result in defaults.
 
 
York Capital Management – 4
th
Quarter, December 31, 2008 – Offshore
 
3
 
With the mortgage distressed cycle already in the restructuring phase, we have been active in the whole loanmortgage space through our majority investment in a specialty servicer, Arch Bay. Whole loans offer significantbenefits over mortgage backed securities as investors with access to servicing expertise can restructure the loansto create value. Arch Bay enables York to purchase loans at steep discounts, rehabilitate those loans through loanmodification and principal forgiveness, and resell the modified loans at a profit. In 2008, Arch Bay purchasedapproximately $300mm in loans at discounts steep enough to substantially offset further declines in home prices.In 2008, Arch Bay closed on 2.8% of bid requests, representing $600 million (face value) of mortgages out of $21.4 billion (face value) of mortgages analyzed.In 2009 and 2010, we expect to substantially increase our allocation to whole loans both through our hedge fundsand a new fund, the York Distressed Mortgage Fund that is dedicated to investing in whole loans. We plan tolaunch the fund during the first quarter of 2009.
North America
The North American equity book struggled during the 4
th
quarter primarily due to continued selling pressure in theindustrial commodities sector, particularly during the month of October. During November and December, the bookstabilized and began to perform more in line with its net exposure to public and private equities. In keeping withour efforts to emphasize positions with stock specific risk, we generated some profits by investing in a number of high quality insurance companies that have taken mark to market losses in their investment grade corporate bondportfolios as spreads hit all time highs. We believe that the investment grade market offers tremendous value andwith little supply of investment grade bonds available, we viewed the insurance sector as a cheap way to capturethose spreads.
Cumulative
 
Asset
 
Growth
0200400600Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec2008
      $     i    n    m     i      l      l     i    o    n    s
Unpaid
 
Principal
 
Balance
 
(face
 
value)Purchase
 
Price
 
Cumulative
 
Asset
 
Growth
 
 – Arch
 
Bay
 

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