Newsletter Volume 1, Issue 2

Volume 1, Issue 2: June 7, 2018
Written May 18th, 2018
Published Privately to Accredited Investors Only Prior to Filing Form D for 506c with Securities And Exchange Commission

 


Mach 100 LP Investment Performance Results are presented gross and net. Net results are for an investor since inception, net of 1% management fee and 25% performance allocation with a “high watermark” threshold. Individual investor’s performance may vary based on time of investment and class of investment. Since inception returns are from fund inception 4/2018.

See Important Performance Disclosures

April, 2018 was the first month of investing (after an 8 month process to establish the fund) for our hedge fund, Mach 100 LP. For the month ending April 30, 2018, Mach 100 LP was up 14.23%. This compares to the S&P 500 that was up .27%, the NASDAQ Composite up .04% and the Russell 2000 which was up .81%. Year to date (YTD) through mid-May, the S&P 500 is up 1.7%, NASDAQ Composite up 6.9% and Russell 2000 is up 5.8%. Beginning with the quarter ending June 30, 2018 (when we will then possess a full quarter of performance) we will begin reporting quarterly returns, as well as monthly; and then with more performance data, annual returns. April was a month filled with significant volatility (upside and downside). As Mach 100 LP’s investment strategy is a non-correlated, long/short, strategy that is a concentrated fund focused upon information arbitrage, it is expected that our positions in the fund often trade based upon their own fundamentals and the supply demand situation or event that is fact specific to the respective security (e.g. stock, bond, metal, etc.); not based upon the performance of the broad financial markets. Our investment performance in April, with Mach 100 LP being substantially up for the month, with the broad U.S. financial markets being volatile and their indices relatively flat, is indicative of Mach 100 LP’s goal of seeking non-correlation to the indices.

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PORTFOLIO COMPOSITION

Conviction Position

Currently, our largest position, a conviction position (we have strong conviction that this investment will be successful), is a medical device company that is the leader in In Vivo Fertilization. It possesses an approved medical device which is producing fertility results (measured in #’s of successful pregnancies and healthier babies), geometrically better than In Vitro Fertilization and at a fraction of the cost. The total available fertility market worldwide (device and procedure) is in the billions. This investment opportunity is compelling because of the following major factors (there are many minor considerations as well): The Company’s medical device is approved by the FDA; the device has a very high degree of efficacy with scintillating results in the real world; despite being an early adopter’s solution it has paying, fertility patients; the company is almost virtual in the sense that is has a very low head count and overhead and therefore a very low burn rate; management is good with a few leading members of the board who are very strong, who are guiding the company as it develops its business plan and life as a public operating company; the company like many early stage companies in the medical device space who have product approval and customer “traction” could easily become a target for acquisition by large medical device company suitors; the valuation was very low when we invested at the beginning of April. We participated in a private placement and purchased non-callable convertible notes to acquire our position. Since our investment, the underlying common stock of the company has increased substantially [read increased geometrically]; and although there are no guarantees, we expect that the Fund will profit from this investment as it has to date and enjoy further gains.

 

Sector Allocation

Currently (approximately as of this writing) the Fund has positions (which are always subject to change without notice or obligation), long and short, in the following industry sectors and subsectors: medical device (fertility); medical device (home infusion); electronic manufacturing services; semiconductor capital equipment; software (mobile advertising); software (cloud based marketing automation); automotive (electric vehicles)

 

Long/Short Portfolio Exposure

Currently, (approximately as of this writing) the Fund’s long/short portfolio exposure (which is always subject to change without notice or obligation), the Fund’s is 73% Long, 5% short and 27% in cash. Therefore 68% Net Long.

 

GROUP AND SECTOR ROTATION

Strongest and Weakest Sectors

Group and sector rotation is an important part of a comprehensive investment process, as it is a direct reflection of money flow and therefore supply and demand (in the form of trading volume) of various investment instruments (e.g. stocks, bonds, ETF’s, metals, etc.); and volume is the fuel of price. Currently, the strongest sectors are: oil and gas exploration and production; enterprise software; medical device; transportation (shipping); oil and gas equipment; retail shoes and apparel; and hospitals. The weakest sectors are: food (dairy products, confectionary and meat); insurance; retail (drug stores); automotive/truck (replacement parts and tires); and building hand tools.

TRADING PSYCHOLOGY

While I plan to usually write about a compelling investment theme, this month I want to also discuss trading psychology. For those of you who already read this (the following paragraph) from our blog posting, there is more detail here.

We believe that trading psychology is the single greatest factor determining an investor’s (professional fund manager or individual investor) investment returns. One must possess the right trading psychology (mental and emotional composition) to position the fund or portfolio such that it has the opportunity to be successful and drive superior investment returns. Trading psychology means trading rules and ways of thinking. We are constantly refining internally established trading rules [read- refining not changing]. Trading rules facilitate risk control and determine return risk profile, position size, scaling positions (in and out), loss limits for long and short positions, price targets, trading around core positions, reasons and implementation for bracket orders and balance and prioritization of technical vs. fundamental analysis and event driven occurrences by position. Therefore Trading psychology is imperative for every aspect of portfolio management. In addition, in terms of ways of thinking, one must recognize greed and fear, regret, euphoria and panic, as well as over-trading and the worst of all, vengeance trading. Vengeance trading (aggressively trading without sufficient calculation, trading on impulse not on instinct, trying to make up for previous losses) is a fabulous way to self-destruct! Understanding ways of thinking is just as important as trading rules themselves. For example, to avoid unnecessary “blind spots,” it is important to understand that price action does not make a sound premise necessarily correct [think Tesla at $400 per share]. Constant application of trading psychology is required to deliver superior and of equal importance, consistent, investment returns. We are not inventors of the concept of trading psychology. In fact it has been written about for 177 years with the first book about this subject written in 1841 by Charles Mackay, called “Extraordinary Popular Delusions and the Madness of Crowds.” Beginning in the late 1980’s there were the first of several books, including the famous “Market Wizards” series of books by Jack Schwager and most recently, the popular TV series, “Billions.” However, most fund managers ignore application of trading psychology. We think it is paramount.

COMPELLING INVESTMENT THEME

Artificial Intelligence

Artificial Intelligence, also known as AI, is autonomous machine intelligence. AI can be exemplified in robots, computers performing various functions, or even your NEST brand thermostat at your home or office that learns what temperatures you prefer during various times of the day or night. However, today there are much more complex challenges being attacked by developers of AI to conquer the world’s challenges with more sophisticated solutions. Traffic for example is a complicated problem. The “Waze” application, acquired by Google in 2013, utilizes AI. Waze utilizes crowdsourced traffic information from its user community of drivers to identify traffic, construction, road maintenance, emergency responders blocking the roads when attending to emergencies, etc.; and then its computers (thousands of servers) process this information and the system learns from all the inputs (the user generated information from the drivers) and then suggests optimal and alternative routes in real time. Artificial Intelligence has also been used for years in the avionics of airplanes. Specifically the auto-pilot function. The New York Times reported that the average flight of a Boeing plane involves only 7 minutes of human-steered flight, typically allocated for takeoff and landing; of course there are many exceptions. Ridesharing Apps like Uber and Lyft utilize AI to predict rider demand and surge pricing. These examples are just the tip of the iceberg in terms of applications that utilize Artificial Intelligence I to make our lives better. Future applications of AI in our everyday lives include but are obviously not limited to: self-driving cars; school grading, assessment and plagiarism checkers; smart email categorization (e.g. Google’s Gmail priority inbox); finance for deposits (deciphering handwriting on checks deposited via ATM or smart phone and reading handwritten numbers), credit decisions, fraud control (my bank is relentless at confirming my transactions by text and email). All of these text and email messages from our banks, confirming our transactions, consist of learning computers, artificial intelligence at its finest, which keep learning our spending habits, to protect us. Even social networking platforms such as Facebook, Instagram, Pinterest and Snapchat use a modicum of AI; and let’s not forget Amazon with “Alexa.” Many AI pundits believe AI will bring a second Industrial Revolution. Billionaire Mark Cuban believes AI will create the world’s next Trillionaire. From an investment standpoint, we believe that AI is an investment theme that must not be ignored.

COMPANY TO WATCH

Tesla Inc. (NASDAQ: TSLA)

Tesla Inc., formerly known as Tesla Motors, as many of you know, designs, develops, manufactures, markets and sells fully electric automotive vehicles and stationary energy storage systems. We are not even remotely close to being early or unique regarding our views on Tesla; but still it is a fascinating situation. We could write pages about Tesla but we will be brief and “cut to the quick” as they say. Tesla has a $50 Billion market capitalization; and that’s after losing 25% of its value in the last few months. It’s revenue run rate is $12 billion per year and therefore $3 Billion per quarter. Tesla is losing money every quarter and their losses are increasing. Contrast Tesla with Ford. Yes Ford Motor Company. Ford has only a $45 Billion market capitalization. Yet Ford generates $120 Billion per year in revenue, earnings run rate of approximately $1.55 per share with a P/E ratio of only 6. Yes 6. Interestingly enough, the more cars Tesla produces, the more money it loses. For example, for every Model 3 that Tesla produces, the company’s operating expense is $35,000. Automotive analysts suggest that each Model 3 also has a total COGS (cost of goods sold) of approximately $36,000. Accordingly each Tesla Model 3 costs approximately $71,000. Even with greater volume (and production has slowed below Tesla’s guidance), the new Model 3’s that have been represented by Tesla to sell for $36,000 will cause ever greater cash hemorrhaging. Additionally, Tesla has again amended its secured, revolving, credit facility, to allow it to include the Fremont, CA production facility as collateral to its lenders. While it may/may not actually do this, it is not a great sign. Greater significance can be attributed to Moody’s recent downgrade of Tesla’s junk bonds and indicated [read threatened] that there would be another downgrade unless Tesla’s financial health improved. Finally, because we promised to keep this piece about Tesla short (pun intended), the Company is burning $675 million per quarter, with only approximately $3.5 Billion in cash (5 quarters of cash remaining), it’s $24 Billion of debt standing at 84% of its assets (many companies fail to raise additional capital from the credit markets at this debt to asset ratio) and competition from the likes of Audi, Porsche, Volkswagen (almost every other automobile manufacturer) is just around the corner. Mach 100 LP is currently Short Tesla (as of this writing).

Mach 100 LP is a small and micro-cap, non-correlated, equity focused hedge fund possessing concentrated positions and capitalizing on information arbitrage (disparities from publicly available information). The Fund’s strategy is opportunistic long/short and its investment objective is to generate absolute returns that are largely alpha (the active component of investment returns that are in excess of the financial markets’ movement as a whole). The Fund utilizes fundamental quantitative and qualitative analysis, assessment of securities and broad market behavior, trading psychology and return risk profiling to select investments across asset classes, instrument types, industry sectors and geographies. Managed by industry veterans, the Fund is designed to generate consistent, positive investment returns with low net portfolio exposure and lower correlations than typical equity market benchmarks. As a pooled investment vehicle, the Fund may employ a diverse combination of equity, equity arbitrage, equity linked derivatives, debt and other investment and hedging instruments (including cash) in order to achieve its objectives. The Fund’s long portfolio focuses upon emerging growth companies across the small and micro-capitalization tiers (~$50 million to $2 billion). Its short portfolio focuses upon fundamentally flawed companies. This strategy presents both the opportunity to achieve higher gains, as well as creating unique challenges that require significant skill as well as possessing deep and broad experiences within these volatile capitalization tiers; and of paramount importance, the right trading psychology. Mach 100 LP believes it has the right team to successfully capitalize on these opportunities to produce superior investment returns.

 

Fund Service Providers
Prime Broker: Escrow Bank Administrator Auditor Securities Counsel
Interactive Brokers LLC CIBC Bank Opus Fund Services LLC KPMG Faegre Baker Daniels LLP

Mercadyne Fund Management LLC is an investment firm founded in 2017. We actively manage capital for our accredited investors. Mercadyne has offices in Las Vegas, Nevada and Portland, Oregon. We employ a research-intensive investment approach which seeks non-correlation to the broad market indices. We utilize fundamental quantitative and qualitative analysis, assessment of securities and broad market behavior, trading psychology and return risk profiling to select investments across asset classes, instrument types, industry sectors and geographies. Our organizational structure decentralizes investment research and analysis and centralizes decision-making and risk management. This approach enables us to avail ourselves of a broad range of ideas and expertise from within the firm, consulting research firms and peers, while ensuring that we possess and maintain portfolio control and comprehensive risk management. We are committed to producing excellence across all functions of our business and seek to deliver superior performance to our investors.

David N. Baker      Steve Shum

David N. Baker

Managing Principal

Mercadyne Fund Management LLC

6565 Spencer St., Suite 205

Las Vegas NV 89119 

dnb@mercadyne.com

415.297.4749

 

By |2018-09-10T19:46:46+00:00August 30th, 2018|Unaccredited Newsletters|0 Comments