Groveland Capital Encourages Board of Donnelley Financial Solutions to Pursue Strategic Alternatives

Minneapolis – Wednesday, June 6, 2018 — Groveland Capital, LLC today announced that it has sent a letter to the Board of Directors of Donnelley Financial Solutions (NYSE: DFIN) requesting a meeting and strongly recommending that Donnelley’s Board of Directors announce a plan to explore strategic alternatives. The body of the letter is as follows:

Dear Board of Directors:

Groveland Capital has a significant ownership stake in Donnelley Financial Solutions, Inc. (NYSE: DFIN) (“Donnelley” or “DFIN” or the “Company”) and has been a long-term holder of the stock. Needless to say, we’re very disappointed in the Company’s stock performance since it became an independent public company back in October 2016. The stock closed at $22.97 per share on October 3, 2016 and as of June 4, 2018 the stock closed at $15.47 per share, or a decline of approximately 33% compared to the S&P 500, which has risen about 31% (excluding dividends) during that same timeframe.

DFIN’s stock performance is unacceptable to shareholders and clearly indicates a failed spinoff as well as an uninspiring investor day. The stock has declined approximately 10% since management revealed its 5-year plan on May 22nd. With DFIN now trading at 5.0x projected Non-GAAP 2018 EV/EBITDA, it appears that the market has lost confidence in the management team. It is now up to the board of directors to instill confidence in an increasingly frustrated shareholder base. Groveland is strongly recommending that the board of directors announce a plan to explore strategic alternatives. It is our belief that DFIN’s stakeholders would be best served in pursuing the business plan/transition to SaaS currently underway as either a private company (outside of the public spotlight) or as a subsidiary of a larger complementary company, where top and bottom-line growth synergies could be achieved.

Recent financial services M&A transactions are being executed at significant premiums to DFIN’s current valuation. Intralinks sold for approximately 4.0x revenue to Siris Capital, Lionbridge Technologies sold for about 10.4x EV/EBITDA to H.I.G. Capital, and DST Systems was acquired for 13.8x EV/EBITDA by SS&C Technologies. Even Broadridge Financial Solutions, a competitor with print exposure, is trading at 17.0x projected 2018 EV/EBITDA. A conservative 7.0-8.0x multiple of projected Non-GAAP 2018 EV/EBITDA would value DFIN at $25-30 per share or a 62-94% premium over the current market price.

It is the fiduciary duty of DFIN’s board to safeguard the interests of shareholders. We request the opportunity to discuss this letter with the board in person where we will provide insight into other value-enhancing initiatives that we believe can be pursued to immediately increase shareholder value.


Groveland Capital is a nimble advisory focused on unearthing unique investment opportunities. Based in Minneapolis, Groveland’s insight and global network is complemented by our billion dollar+ fund experience and expertise. Groveland is led by a seasoned team of investment professionals who have continuity, vision and over a decade of experience executing key elements of our investment strategy. For more information, please visit

Seth Barkett

Anthony Giombetti

Meet the Activist Targeting the Activist Who Runs Steak ‘n Shake

Wall Street Journal

A small Minneapolis hedge fund has tried to take a bite out of the company that runs Steak ‘n Shake and the activist that runs it.

Groveland Capital is seeking to remove the entire board of Biglari Holdings Inc.BH -1.78%, including its chairman and CEO Sardar Biglari, himself an activist.

It’s a campaign that’s garnered attention among activists, no strangers to fighting and mudslinging, for its unusually colorful twists and turns.

Who is Groveland?

The hedge fund was started in 2009 and currently manages about $25 million.

It’s run by Nick Swenson, a 46 year-old trader who got his start in distressed debt and previously built a $1.7 billion high-yield debt fund before launching Groveland.

Groveland has never targeted a company the size of Biglari Holdings, which has a market capitalization of nearly $900 million.

In 2012, Groveland went after Air T Inc.AIRT +9.94%, a $57 million air cargo company, and Mr. Swenson gained a board seat that year. A year later, he waged a second campaign and gained seats for his allies in a settlement, eventually becoming chairman and CEO of the company.

Last August, Air T made an activist investment with its own capital alongside Groveland. Together they bought a 14% stake in Insignia Systems Inc.ISIG 0.00%, a retail-marketing company with a market capitalization around $37 million. Insignia then appointed Mr. Swenson to the board last November.

“Nick has had a positive impact,” Insignia CFO John Gonsior told MoneyBeat.

Mr. Biglari has flipped the script and responded to Groveland’s attacks by taking large stakes in both Air T and Insignia. He criticized Mr. Swenson for becoming chairman and CEO of Air T and for implementing a poison pill to block Mr. Biglari.

Groveland has two main issues with Biglari. The first is a licensing agreement Mr. Biglari has signed with the company for use of his name at its Steak ‘n Shake locations, a pact that would pay him 2.5% of revenue and could total close to $100 million at this point. The second is the maneuvering of Mr. Biglari’s own hedge fund, Lion Fund, at Biglari Holdings and the fund’s use of the company’s cash.

In running for the entire board of Biglari, Groveland proposed a slate of six directors, including Mr. Swenson and fellow Groveland portfolio manager Seth Barkett. The list also includes an investment banker, two lawyers and one restaurant-industry executive.

Groveland has said the board slate brings different views about governance and the management of Biglari Holdings. Biglari Holdings says they have no relevant experience.

The slate failed to win over proxy advisers Institutional Shareholder Services Inc. or Glass Lewis & Co.

“If shareholders are looking for an alternative to the status quo, the alternative offered by this dissident slate is underwhelming at best,” ISS wrote, taking the rare stance that neither side was appealing.

Glass Lewis was more open to Groveland, recommending two of the nominees with any restaurant experience: James Stryker, the restaurant executive, and Stephen Lombardo, a lawyer with experience in the industry.

Along with the slate of directors, Groveland has proposed as an interim chief executive Gene Baldwin, a restaurant consultant who has held four different sets of interim titles at various restaurants over his career, as well as led a franchise business.

“Gene is definitely the person that I would call to get a restaurant company back on track,” said John Hamburger, the founder of industry publication Franchise Times.

By David Benoit

Source: Wall Street Journal | Click Link

Schafer: Little known Groveland Capital has a potential win on the table

Even people paid to know such things have never heard of Groveland Capital, a Minneapolis hedge fund manager that is running a spirited campaign to oust the board of a mini-conglomerate called Biglari Holdings.

Even people paid to know such things have never heard of Groveland Capital, a Minneapolis hedge fund manager that is running a spirited campaign to oust the board of a mini-conglomerate called Biglari Holdings.

Groveland is a money manager, but in talking with some folks in investment circles this week, it’s not clear there is much to manage aside from founder Nick Swenson’s own money.

So it’s no surprise that what Groveland called a “meaningful position” turned out to be all of 0.2 percent of Biglari’s stock, rounded up.

Contested board elections can be expensive affairs, but not the way Groveland is doing this one. Its proxy statement estimated costs of no more than $175,000. With the investment it has made in shares, call it a total commitment of less than $1.6 million.

It would seem the barrier to entry in the field of activist investing is close to disappearing altogether.

Don’t get the idea, however, that this is some sort of joke. Swenson declined to be interviewed, but his experience as an investor includes years with the far larger Whitebox Advisors. And in going after Biglari and CEO Sardar Biglari, Swenson has picked a very rich target.

Sardar Biglari is a very interesting case of a revolutionary who took over the palace and then made enough bad decisions once in power to spark another revolution. As an activist hedge fund manager himself, he got the job as CEO after ousting the incumbent directors of a company then called the Steak ’n Shake Co.

Biglari Holdings is now based in Texas, and in addition to restaurants, it owns an insurance company and a magazine publisher. It’s far from a giant, trading at a value in the market of about $860 million.

Biglari started his first hedge fund at age 22, and once in control of what’s now called Biglari Holdings he made it clear that it was no longer a restaurant company but a conglomerate that would own unrelated businesses. It would be his job to shrewdly invest that company’s capital in the best opportunities.

If that sounds familiar, and a little bit like the legendary Warren Buffett of Berkshire Hathaway, well, that’s entirely intentional. Biglari is clearly a devotee, and that helps explain the name change to Biglari Holdings, and the stock ticker symbol to BH.

Biglari doesn’t just decide how much to invest in which business, but also writes long annual letters to shareholders. They don’t have the same tone, but his letters are clearly made to look and feel like the missives of Warren Buffett.

The differences between the two remain stark.

Buffett, for example, doesn’t have an arrangement that gets his private hedge fund 25 percent of any profits on the public company’s investment portfolio that exceed a 6 percent return, as Sardar Biglari does.

This arrangement with his hedge fund “has given unnatural meaning to the phrase ‘virtuous circle,’ ” noted the proxy advisory service Institutional Shareholder Services. “The public company issues equity to raise capital, then invests that capital with the CEO’s privately held hedge fund, through which the CEO then purchases the shares of … the very same public company.”

And, of course, the CEO’s private hedge fund stands to collect a 25 percent incentive fee.

The board’s explanation for this — the returns sure seem to have been good — begs the imagination, according to ISS.

It’s also impossible to imagine Warren Buffett licensing his name to Berkshire Hathaway, as Biglari did to publicly held Biglari Holdings. In fact, it’s difficult to imagine just about any other CEO doing that.

Biglari’s deal with the company doesn’t call for fees to be paid now, but the company would pay a license fee equal to 2.5 percent of revenue for a minimum of five years if he loses his role as CEO.

How the board could have soberly considered and then approved this one is another head scratcher. As a personal brand, “Biglari” is obviously a far less valuable asset than, say, “Buffett.” In fact, the Berkshire CEO’s reputation as a genial investor who buys a business and then leaves its managers alone is a key advantage when competing with other potential buyers for good companies.

Biglari enjoys no such reputation for geniality. A shareholder in both Berkshire and the Biglari Holdings once observed to the Wall Street Journal that “Warren Buffett charms people. Sardar Biglari doesn’t seem to be charming anyone.”

The hedge fund relationship, the incentive fee, the license deal, all of it has been grist for Groveland’s mill as it makes a case to shareholders for a new board. And it’s a case the firm has been winning. Both of the big proxy advisory firms decided to recommend that no shareholder vote any shares for Biglari’s board nominees.

That doesn’t mean Groveland’s slate can coast to an easy win. Its problem is that, well, it’s a tiny hedge fund few have heard of. And it doesn’t just want one seat, it wants all of the them. That would be challenge even with a slate of all-stars, and Groveland’s lineup falls well short of that. The proxy adviser Glass, Lewis & Co. came out in support of two of them, but ISS said the contest for the board of Biglari Holdings has turned into a “none of the above” election.

Somebody actually does have to win the shareholder vote next week, though. And if Groveland somehow gets enough of its slate elected to control the board, then that’s quite a business achievement for this little firm.

It may even attract some paying clients.

Source: Star Tribune | Click Link

Credit Swaps in U.S. Decline on Prospect of ECB Bond Purchases

The Markit CDX North America Investment Grade Index, a credit-default swaps benchmark used to hedge against losses on corporate debt or to speculate on creditworthiness, dropped 6.2 basis points to a mid-price of 105.1 basis points at 5:09 p.m. in New York, according to prices compiled by Bloomberg. Contracts tied to Sprint Nextel Corp. fell to the lowest since September and those on Expedia Inc. dropped the most since 2009.

Investors are looking to euro-area leaders to stem the region’s fiscal crisis and avert a contamination of global balance sheets. French President Francois Hollande and German Chancellor Angela Merkel said today their nations are “bound by the deepest duty” to keep the currency bloc intact, echoing a commitment made yesterday by Draghi.

“For Europe, it will take a while for all their austerity measures to be put in place and take hold and help their debt balances,” Greg Tornga, head of fixed income at Edge Asset Management in Seattle, which manages about $20 billion, said in a telephone interview. “The union being more of a union and Hollande and Merkel announcing their intention and plans of how they want to get in place with buying Spanish and Italian debt is a positive.”

Bond Purchases

Spanish yields soared to a record this week, reaching levels that prompted bailouts for Greece, Portugal and Ireland and raising concern the nation might need a rescue of its own. The yield on Spain’s 10-year notes fell 18 basis points to 6.74 percent at 12:04 p.m. in New York.

“There was a serious danger that confidence keeps eroding” in Spain’s ability to repay debt, Nick Swenson, chief executive officer and portfolio manager at Minneapolis-based Groveland Capital LLC, which oversees $15 million, said in a telephone interview. “We’re reaching a tipping point.”

Draghi’s proposal involves Europe’s rescue funds buying government bonds on the primary market, flanked by ECB purchases on the secondary market to ensure transmission of its record-low interest rates, the officials said on condition of anonymity because the talks are private.Further ECB rate cuts and long-term loans to banks are also up for discussion, one of the officials said.

Draghi said yesterday policy makers will do whatever is needed to preserve the euro.

Insufficient Confidence

The credit-swaps index fell even as data today from the Commerce Department showed the U.S. economy expanded at a slower pace in the second quarter. Gross domestic product, the value of all goods and services produced, rose at a 1.5 percent annual pace in the period after a revised 2 percent first-quarter gain.

“We would definitely like it to be higher,” Tornga said of the U.S. GDP. “Given just the general sense of volatility and uncertainty, I don’t believe there is enough overall confidence in the market for consumers to spend more than what they really need to.”

The default premium on the Markit CDX North America High Yield Index, a measure of U.S. speculative-grade corporate debt risk, fell 29.3 basis points to a mid-price of 565.4 basis points, the lowest since March 28, Bloomberg prices show.

The Markit iTraxx Europe Index of 125 companies with investment-grade ratings declined 7.2 basis points to 162.8.

Expedia CDS

Credit-default swaps tied to Expedia, the online-travel company with $1.25 billion in outstanding bonds, fell 18.7 basis points, the most since September 2009, to 191.4 basis points at 4:03 p.m. in New York, Bloomberg prices show. Second-quarter sales rose 14 percent to $1.04 billion, the Bellevue, Washington-based company said in a filing released after the close of equity markets yesterday.

The cost to guard against losses on the debt of Sprint has fallen 5.4 percentage points since July 25, according to data provider CMA, which is owned by McGraw-Hill Cos. and compiles prices quoted by dealers in the privately negotiated market.

Credit-default swaps tied to the Overland Park, Kansas-based company fell 1.6 percentage points today to 3.3 percent upfront, according to CMA. The contracts traded at 8.7 percent upfront on July 25.

Sprint, the third-largest U.S. wireless carrier, said yesterday second-quarter revenue jumped 6.4 percent to $8.84 billion, compared with an average estimate of $8.73 billion called for by analysts surveyed by Bloomberg.

The price of the swaps, which typically falls as investor confidence improves and rises as it deteriorates, means investors would have to pay $330,000 initially and $500,000 annually to protect $10 million of Sprint’s debt.

Credit swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt.

By Brooke Sutherland

— Editors: Richard Bravo, Alan Goldstein

Source: Bloomberg | Click Link

Money Managers Seek to Profit from Europe’s Woes

When Moody’s Investors Service (MCO) downgraded Ireland’s sovereign debt to junk status on July 12, a week after giving Portugal’s debt similar treatment, it came as no surprise to Sandor Steverink. Europe’s best-performing government bond fund manager over the last decade, Steverink predicted both downgrades. Soon it will be time to buy, he says. “What we’ve learned from emerging markets is that you get only a full recovery after a proper restructuring,” says Steverink, who is co-head of a team managing €26 billion ($36.4 billion) at Dutch insurer Delta Lloyd. “We think that’s necessary for Greece and, in the end, probably for Ireland and Portugal, too.”

Of the two countries, “we prefer Ireland above Portugal,” he says, because Ireland’s debt burden was caused by the banks, not by “structural problems” such as heavy government borrowing and slow growth. He believes Ireland also has more potential to export its way out of trouble. Ina Goedhart, Steverink’s colleague, says the fund would wait at least a month before buying any Portuguese debt. Why? Many investors who can’t hold the bonds now that they have been downgraded to junk status will be forced to sell, pushing their prices down, says Goedhart.

Steverink’s Delta Lloyd Institutional Obligatie has returned 5.8 percent a year since 2001, making it Europe’s best-performing euro-denominated government bond fund with more than €500 million of assets over the past 10 years, according to Morningstar (MORN). It also beat all rivals over the past three and five years.

While Steverink hopes to profit from low-rated bonds rebounding, others are betting on price declines. Nick Swenson, who runs Groveland Capital in Minneapolis, has been speculating on sovereign defaults in peripheral European countries since March 2010. His $10 million fund is buying credit-default swaps on Spanish and Italian government bonds. CDS are a type of insurance that makes investors whole if a borrower fails to pay. Even without a default, their prices can rise when the bonds they are linked to fall in value. Swenson believes CDS on Spanish and Italian government bonds offer potential for profit because they are underpriced in light of the countries’ shaky finances. “People think they aren’t at risk of defaulting,” he says. “Prices of all non-Greek bonds seem to be too optimistic.”

Olivier De Larouzière, who manages Paris-based Natixis Asset Management’s Souverains Euro fund, is betting against medium-term Spanish bonds. The market’s view of Spain is “too positive, if you consider how systemically risky the country is,” says De Larouzière. “It will be much more difficult for the institutions to deal with a Spanish crisis.”

Some hedge funds are moving beyond a direct bet that sovereign debt values will tumble, targeting potential fallout in the corporate debt market and the banking industry. They are making investments that will pay off if heavily indebted nations such as Portugal, Spain, and Italy slash spending, slowing growth and reducing discretionary consumer outlays. “Our thesis is that the bad countries can make bad corporate debt,” says Simon Finch, head of credit trading at CQS UK, a London-based hedge fund that oversees $11 billion. Finch has been trading the debt of mobile-phone companies, which he expects to suffer. “If you crimp people’s spending, you’ll find that phone calls are surprisingly discretionary,” he says.

Marathon Asset Management, a $10 billion fund run by Bruce Richards, told clients in a mid-June presentation that it’s evaluating the purchase of portfolios of $1 billion or more of real estate and corporate loans from banks in Portugal, Ireland, Spain, the U.K., and Italy that will be forced to sell debt to raise capital. Marathon, based in New York, says it has already traded more than $1 billion worth of sovereign credit in the peripheral European countries this year, using both CDS and bonds.

The bottom line: As Europe struggles to resolve its debt crisis, some money managers are betting bonds will fall even further and economies will slow.

By Katherine Burton, Kevin Crowley, Saijel Kishan, and Anchalee Worrachate

Burton is a reporter for Bloomberg News. Crowley is a reporter for Bloomberg News in London. Kishan is a reporter for Bloomberg News.Worrachate is a reporter for Bloomberg News.

Source: Business Week | Click Link

Hedge Funds Move Past Greece With Bets on Wider Debt Crisis

Bloomberg News

Hedge funds that trade bonds and loans are increasing bets that Europe’s sovereign-debt crisis will spread to Portugal, Spain and Italy, even after Greece wona temporary reprieve with 12 billion euros in aid.

“Nothing you’ve seen so far has dealt with solvency, just liquidity,” said Simon Finch, head of credit trading at CQS UK LLP, a London-based hedge fund that oversees $11 billion.

Finch, who has bought and sold corporate bonds and loans for 18 years, has stepped up trading in mobile-phone, utility and toll-road companies in the three countries. He expects their governments will be forced to slash spending to pay off lenders, slowing growth and reducing discretionary consumer outlays.

CQS is among the hedge funds that say investors are underestimating the odds of distress or even default not only by Portugal, whose credit rating was downgraded this week to junk status by Moody’s, but also by the bigger Italy and Spain. The funds are moving beyond a direct wager that sovereign debt values will tumble, targeting potential fallout in the corporate-debt market and the banking industry.

“We are on the verge of an economic collapse which starts, let’s say, in Greece, but it could easily spread,” billionaire investor George Soros said during a panel discussion in Vienna on June 26. “The financial system remains extremely vulnerable.”

Laying Low

Most hedge funds had been hesitant to make big wagers against European debt ahead of the parliamentary vote in Athens last week that led to the European Union approving the aid to Greece, said Omar Kodmani, senior executive officer at London-based Permal Investment Management, a unit of Legg Mason Inc. that has invested $23 billion with hedge funds on behalf of clients.

Finance chiefs of the 17 nations that use the euro also pledged to complete work on a second rescue package that could reach 85 billion euros ($122 billion) and would involve banks rolling over 70 percent of Greek bonds maturing by mid-2014.

“Most opinions on the euro zone and Greece were not very pessimistic,” Kodmani said. “People saw it as a problem that could be postponed, so there hasn’t been much negative positioning.”

Hedge funds had been reluctant to discuss any bearish trades they made for fear of sparking protests from regulators who view the investors as vultures. On July 5, European lawmakers called for restrictions on traders’ uses of credit-default swaps to profit from failures on sovereign debt they don’t own. Credit default swaps are a type of insurance that makes investors whole if a borrower fails to pay.

Assessing Austerity’s Impact

Now that an immediate Greek default has been avoided, investors are looking for ways to play continued distress among countries including Italy, the euro area’s third-largest economy, and Spain, its fourth. The extra yield investors demand to hold Portugal’s 10-year bonds over German bunds slipped 19 basis points today to 994 basis points from a euro-era record of 1015 basis points yesterday, when Moody’s cut the country’s credit rating four levels to Ba2, below investment grade. Italian 10-year bonds fell today, driving the spread over German bunds to the most since before the euro was introduced in 1999. The Italian yield increased more than 5 basis points to 5.175 percent, pushing the difference over bunds to 221 basis points. The spread over German bunds for Spain’s 10-year bond was 265 basis points, up from 206 basis points a year earlier. A basis point is 0.01 percentage point. One area where Finch has been trading is the debt of mobile-phone companies, whose ability to repay bonds and loans could be diminished by austerity-triggered economic slowdowns. If such companies were downgraded, the market would be flooded with junk bonds, causing prices to fall.

“If you crimp peoples’ spending, you’ll find that phone calls are surprisingly discretionary,” Finch said.

Market Overhang

Portugal Telecom SGPS SA, the country’s biggest telephone company, is rated one rung above junk, according to a presentation that Finch made to investors in May. In the event of a downgrade, its 5.8 billion euros of debt would equal about one-10th of this year’s forecasted issuance of 55 billion euros to 60 billion euros in non-investment-grade bonds.

Telecom Italia SpA, Italy’s biggest phone company, is rated two notches above high yield. In the event of a downgrade, it would equal half of this year’s estimated issuance, according to the presentation.

Finch is also looking at utilities and toll roads where prices charged to consumers are regulated by the government. Budget-cutting measures could keep the government from providing subsidies to corporations, which will then have to make up the gap between the cost of providing services and what people can pay for them.

“Our thesis is that the bad countries can make bad corporate debt,” he said.

Marathon Asset’s View

Marathon Asset Management LP, a $10 billion fund run by Bruce Richards, told investors in mid-June that it’s evaluating the purchase of portfolios of $1 billion or more of real estate and corporate loans from banks in Portugal, Ireland, Spain, the United Kingdom and Italy as they are forced to sell debt to raise capital, according to a presentation sent to clients.

Richards expects some countries to nationalize financial institutions and sell assets because the banks have borrowed too much money.

“The banking problem is acute throughout Europe, including the German, French and U.K. banks, which have begun to sell assets and raise capital,” Richards wrote in the 27-page presentation.

Marathon, based in New York, said it has already traded more than $1 billion gross market value of sovereign credit in the peripheral European countries this year, using both CDS and bonds.

Too Sanguine

Nick Swenson, who runs Groveland Capital LLC in Minneapolis, has been wagering on sovereign defaults in peripheral European countries since March 2010. He’s not concentrating on Portugal or Ireland. Instead his $10 million fund is buying credit-default swaps on Spanish and Italian government bonds, which are cheaper than those other countries and whose defaults would potentially cause more damage in the market.

“Italy and Spain seem to be outliers,” he said of the relatively robust prices of their CDS, which trade at 222 basis points and 307 basis points, according to data provider CMA, compared with 935 basis points for Portugal and 2,150 basis points for Greece. “People think they aren’t at risk of defaulting.”

Economic Inertia

Credit swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt.

While their economies are certainly more robust than Greece’s, Italy and Spain aren’t out of the woods, Swenson said. “The scale of their economies creates an inertia that somehow raises the probability of something bad happening,” he said.

“The need to restructure the periphery and the quite reasonable demand that bondholders take pain will, in my view, happen,” said Swenson. “It’s not a radical view and yet prices of all non-Greek bonds seem to be too optimistic.

Al Moniz, portfolio manager at Fore Research & Management LP, a New York-based hedge fund with $1.9 billion under management, said he is “very bearish” on European sovereign debt and the region’s banks, though he declined to say how he was positioning his portfolio to take advantage of that weakness.

“We are still in the early stages of the European crisis,” he said. “It hasn’t even been 30 percent played out.”

–With assistance from Mary Childs in New York. Editors: Larry Edelman, Edward Evans.

Groveland Capital Opens to Institutional Investors

Hedge Week

Minneapolis-based Groveland Capital has begun to actively market its Groveland Hedged Credit Fund to institutional investors.

Nick Swenson founded Groveland along with members of his credit team and the fund was launched in January this year.

Swenson was previously the portfolio manager and partner of Whitebox Hedged High Yield Fund from 2002 to early 2009, where peak AUM was USD1.65bn.

Swenson says: “The market environment typically offers reasonable returns via arbitrage techniques, yet generating outsized returns by leveraging the bell curve is not our game. We seek out those unusual and irregular situations that contribute extra alpha via the insight derived from careful value investment research. We believe the most attractive returns are generated when the tightly-mapped disciplines of arbitrage and hedging are combined with knowledge of special situations.”

Groveland seeks to balance arbitrage and value investing while building its portfolio around hedged credit and distressed opportunities.

“Since launch, we have been gradually building our portfolio and reinforcing processes,” says Swenson. “While today’s markets are quiet and orderly, our research indicates that the six month to two-year horizon is likely to offer compelling investment opportunities in our domain of expertise. Mr. Market will make certain that this time is different. Now is the time for us to come to the institutional market.”

Hedge Funds Bet Europe’s $1 Trillion Bailout Won’t Solve Crisis

“The EU and the IMF effectively went all-in with a bad hand in the highest stakes game of financial poker ever played with the world,” wrote Bass, head of Dallas-based Hayman Advisors LP, in a letter to clients sent after the bailout was announced.

Bass bought gold last week and took other steps to position the fund for hyperinflation and a “competitive devaluation” by Europe, Japan and the U.S. that he is forecasting, according to the letter. Christopher Kirkpatrick, general counsel for Hayman, declined to elaborate on the comments.

Managers who made short bets on U.S. subprime securities as the housing market was imploding in 2007 and 2008 see similar opportunities in Europe, said Nick Swenson, who manages Minneapolis-based Groveland Capital LLC and profited as mortgages tumbled. In March, he started buying credit-default swaps on Spanish, Italian and Irish government bonds, a sort of insurance that pays off in the event of a default or restructuring.

“It’s asymmetric — it reminds me of the subprime trade,” he said in a telephone interview.

Yesterday, Germany said it was temporarily prohibiting naked short-selling and speculating on European government bonds with credit-default swaps. Naked short sellers bet against a security without first borrowing it.

Euro Decline

The euro tumbled to as low as $1.2159 after the pronouncement. In February, as some investors forecast that Greece might not be able to pay its debts, French Finance Minister Christine Lagarde said she wanted politicians to take a united approach against “speculators” betting on government bond defaults.

Swenson decided to buy the sovereign CDS after looking at the external-debt-to-exports ratios of the 26 countries that have defaulted on their debt since 1970. The average ratio for those countries was 2.3. As of the third quarter of 2009, Spain’s was about 6.9 and Italy’s was about 5.1, he said.

While the CDS on these bonds rose in April and have since dropped nearer to levels where he bought them, Swenson isn’t selling. He believes the chance that one of the three countries will default or restructure is greater than the 9 percent currently priced into the CDS.

Paulson Stays Out

John Paulson, who made $15 billion betting on the subprime trade, is one manager who may not be replicating the CDS trade he used three years ago. Earlier this month, in a conference call with investors, he called Europe’s debt problems “manageable.”

A weaker euro will benefit French and German exporters, he told clients. Like Bass, he’s been forecasting a jump in inflation, which is why he’s been a buyer of gold and gold producers since at least last year.

For other managers, the potential profits from betting against Europe still outweigh the costs. Swenson pays 1.3 percent annually to put on his bet against Irish, Spanish and Italian debt.

Mark Hart, who runs Fort Worth, Texas-based Corriente Advisors LLC, returned $320 million of the $424 million European Divergence Master Fund LP in February, after betting that some European governments will default on their bonds.


“The European divergence theme offers an asymmetric risk/reward profile,” Hart told clients at the time. “The sovereign debt problem in Europe is widespread and is not isolated to a single issuer.”

Hart, who also profited from bets against subprime mortgages, didn’t return a call seeking a comment.

Matrix PVE Global Credit Fund, a 110 million-euro ($133.9 million) fund run by Gennaro Pucci based in London, gained 19 percent in April because of bets that Europe’s credit crisis would worsen.

“The ECB is buying debt at artificial levels, but that won’t solve structural problems,” Pucci said in a telephone interview.

Matrix Group Ltd. manages about 3 billion pounds ($4.3 billion) including a half-dozen hedge funds. The credit fund sold most of its CDS positions in the recent jump in prices, and then put some back on at current levels.

“We’re in the aftermath of a financial crisis,” Pucci said. “It’s not unusual for sovereign debt to explode.”

By Katherine Burton and Tom Cahill

–Editor: Christian Baumgaertel, Josh Friedman

Hedge Funds Bet Big on the Falling Euro

Bloomberg News

Hedge funds, including Hayman Advisers and Matrix Group, have told investors that they expect the sovereign debt crisis to worsen despite the €110bn (£79bn) bail-out by the International Monetary Fund, the European Union and the European Central Bank.

Anxiety about the financial health of Europe increased yesterday after Spain’s national bank was forced to take control of CajaSur, a savings bank ridden with distressed property debt, after a rescue merger with a rival collapsed.

Traders and brokers told The Sunday Telegraph that hedge funds are using a range of financial instruments to bet that the value of the euro will fall. One trader said: “Shorting the euro is the biggest bet in town.

“We’re seeing big volumes in credit default swaps and short selling in equities that are exposed to the euro.”

Gennaro Pucci, manager at Matrix, which manages £3bn, generated 19pc returns last month in its €110m Global Credit Fund on bearish euro bets. Mr. Pucci told Bloomberg: “The ECB is buying debt at artificial levels, but that won’t solve structural problems.”

Nick Swenson, manager of US-based Groveland, who made millions of pounds during the credit crisis, said he started buying credit-default swaps on Spanish, Italian and Irish government bonds in March.

Source: The Sunday Telegraph > Click Link