2013 Q3 Review

In Q3 2013, we again posted positive returns.  The return of our portfolio was 1.50%, while the S&P 500 index appreciated 4.66%. In this quarter, we were not able to find too many attractive investments. Some deals on which we invested took longer than expected to close and the portfolio value reflects the gaps that are not closed yet. Furthermore, we were not able to implement our most successful short ideas because our brokerage account cannot short sell stocks.

Municipal Bond Closed-end Fund

We are holding on to NEA. The fund keeps dropping as the market became anxious about the consequences of Fed’s tapering. The current discount is at -2.35 standard deviation from its three-year average discount. The fund is trading at tax-equivalent yield of 10.3% and we still view the investment as an attractive one.

Odd-lot Tender Offers

There were not a lot of these opportunities in Q3. We made some money on COLE (7.8%), WBMD (7.0%) and HAL. In the future, we will actively participate in these offers. I think there will be two deals in the pipeline, and I hope there will be some more at the end of this year.

Going-Private Deals & Merger Arbitrage

It was extremely hard to find attractive deals this quarter. We entered a few positions that were attractive based on raw returns, but took much longer to close. Especially, GLGI suffered from a severe delay in the go-dark process because the company did not have enough employees to handle the filing of 13E3 and 10-K concurrently.  Meanwhile, SPRD experienced a delay in getting government approval because of consecutive holidays in China. I expect the SPRD deal to close in October and the GLGI deal to close by the end of year. In Q3, we briefly participated in the go-private deal or tender offer of DELL, ANTP, MEMS and PVD.  One mistake we made was on INFU, where I did not research the situation thoroughly before I invested a 2% position in the merger arbitrage deal.  The board of directors rejected the buyout offer proposed by the activist shareholder and the stock plummeted subsequently. We think there may be some value in the company because the buyout was rejected as insufficient. Another highly complex deal is RUE. Apax Partners and banks that made financing commitments surely took a huge loss when the teen apparel industry experiences a temporary downturn. However, RUE’s attorney structured the merger agreement which essentially made it impossible for either the buyer or the banks on hook to walk away. While the final outcome remains to be seen, I am fairly confident that the deal will happen.

In the third quarter, I analyzed WH and NLP deals on Seeking Alpha and reached conclusion that neither deal was going to close. WH lost 42% in three days, and NLP dropped 30% in two weeks. It is a pity that my brokerage account cannot short sell stocks.  I paid some attention to CTB and NBG-PRA as well but concluded that these situations are probably too complex for me to choose a side.

On the fundamental investing side, we made a few investments during this quarter as well. In July, I bought DSWL based on the high discount to liquidation value. In September, I followed Carl Icahn and bought AAPL as a short/mid-term investment.  We plan to buy or sell quality or net-net stocks with catalysts from time to time.

Next Quarter

I am optimistic about the next quarter. We will see some of our larger merger arbitrage bets materialize if our judgments prove to be right. There will also be interesting opportunities in corporation liquidation, closed-end fund liquidation, M&A, tender offers, and other event-driven strategies.

Brandon Zhang

Oct 7, 2013

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