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Alternative Market Briefing

Grey Value Opportunity Fund outperforms by delivering 'Unmistakable Alpha'

Tuesday, December 21, 2021

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Steven Grey
B. G., Opalesque Geneva:

"Buying at a deep discount can atone for a multitude of sins," says Steven Grey who manages a long/short portfolio of extremely mispriced securities. This manager's investment philosophy is to invest in extremely mispriced securities that provide an irresistible risk/reward profile and potential for extreme profit. And that philosophy has yielded very good results for his fund of late.

Grey will be presenting at the Small Managers - Big Alpha Episode 6 webinar on January 11th, 2022.

"We target extreme profits…," he explained in a podcast. "Prices are obviously the primary drivers of returns. When you are targeting extreme profits, you are simultaneously targeting a large margin of safety, that kind of classic value approach. It's that uniquely attractive price that provides both an unusual margin of safety and significant upside. It's a little bit tricky because when you are targeting those extreme profits, they tend to require extremist pricing, which in turn requires extremist perceptions. Where you are likely to find those perceptions are opportunities that are contrarian or obscure. So we own it: the market generally hates it or has never heard of it.

"Now, again with the value approach, we tend to focus on balance sheets and cash flow, not relative value, none of the conventional yardsticks. The PE ratios are great but they are meaningless unless you understand the quality of the E, so we take a very qualitative approach. With the types of mispricings that we target, one of the challenges is that they rarely correct very quickly, so we work in a multi-year timeline, and we're largely indifferent to volatility. 2020 offered some fantastic opportunities for guys like us but it's only if you are in a position to distinguish and truly understand the difference between price volatility and actual financial risk that you can exploit the opportunities that we had last year."

Prior to founding Florida-based Grey Value Management (GVM) in 2010, Steven Grey served as the CIO of a private, family-controlled investment entity based in Alexandria, VA, called Freedom Capital Partners. Before that, he was managing director of risk at Albright Capital Management (ACM), a firm he helped launch with former Secretary of State Madeleine Albright. Prior to ACM, he co-managed an event-driven hedge fund at New York-based Windward Capital.

The fund

The Grey Value Opportunity Fund, launched in November 2014 and domiciled in Delaware, is a concentrated long/short portfolio of extremely mispriced securities. The hedge fund does not use leverage. It is said to be structured for Unmistakable Alpha™, that is, minimal beta correlation. It is currently up 14% YTD after returning 0.5% in November. It returned 19% last year.

The Fund focuses on value-oriented equity investments but may also include short positions, special situations, distressed and reorganized securities, event-driven investing, and capital structure arbitrage. The portfolio is not limited with respect to security type and may include various instruments, such as equity, debt, options/derivatives, etc. "The sources and ideas always vary, but the standards and process never fluctuate," says the manager.

Portfolio risk management is primarily a function of investment choice and diversification; market neutrality is not a key objective.

The manager says that what differentiates the fund is that it generates alpha by "combining an authentic analytical edge with obsessive research and extreme price discipline."

The firm's research is bottom-up, that is, it focuses on analysing individual stocks and de-emphasises the significance of macroeconomic and market cycles, and fundamental, that is, it measures a security's intrinsic value by examining related economic and financial factors. The manager boasts 200-400 hours of research per position, using financial statements, corporate data, industry sources, communication with management - but no Wall Street research products or screens.

Value investing is the art of buying stocks which trade at a significant discount to their intrinsic value. It is a popular strategy, up to a point. Market strategists are predicting, again, that 2022 will finally be the year when investors choose value stocks - like banking, oil, consumer, industrial and healthcare companies - over Big Tech stocks.

The HFRI Equity Hedge: Fundamental Value Index is up 12.6% YTD after returning -3% in November. And the HFRI Relative Value: Multi-Strategy Index is up 6.8% YTD after returning -0.7% in November.


Webinar:

Small Managers - BIG ALPHA Episode 6

We are proud to present you Episode 6 of this groundbreaking webinar series with the following carefully screened panel of investment managers:

• Andy Chakraborty, Duo Reges Capital Management
• Lukasz Tomicki, LRT Capital Management
• Steven Grey, Grey Value Management
• Scott Phillips, Lavaca Capital

When: Tuesday, January 11th at 10:30 am ET - 3:30 pm UK time - 4:30 pm CET

Free registration: www.opalesque.com/webinar/

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