Letters

Year in Review

November 2021

 

Year in Review

The end of the calendar year is a great time to reflect on our progress over the past 12 months.

While our performance was below our expectations and ambitions, we made great progress on our short book with high alpha generation; our long investments boosted their respective market share and competitive position, and we reinforced our team. All of this makes us very confident about Somar’s future. Despite the inevitable ups and downs of short-term performance, we are on track to deliver on our goals over a full business cycle which we define as a 5-to-7-year period.

Superior investment performance requires independent thinking. This leads to original ideas and investments. Naturally, periods of underperformance may occur, which hopefully will be more than compensated by periods of outperformance. This doesn’t make it any more pleasant to go through cold years. It is probably even harder for our investors who don’t see the progress our long companies have made through the year. But our policy of open-door communication with our investors offers you a chance to check-in and have your questions answered and understand the reasons behind our confidence for the future.

On a fundamental basis, our long companies performed very well all year with limited exceptions. Not only have they taken market share, but they have also invested in their businesses and enlarged the gap to their competitors. This is very important for their long-term value and the returns on our investment. We have checked frequently with management teams, and not only support their plans but also believe that with limited exceptions, they are executing very well in a fluid outside environment.

One area where results met our expectations for 2021 was our short book. We generated strong alpha for the year and strong absolute profits for the second half. Our performance improved throughout the year. For the year to date we have barely lost money on our short book despite the markets around the world being up. And the short book has done its job in providing downside protection during recent market volatility. This is very encouraging. We look forward to building on these positive results for 2022.

We improved team capabilities by hiring top graduates from elite finance programs in my native Portugal. This new talent is already contributing to our portfolio, and I am confident they will make the organization stronger not only in 2022 but also for years to come. I hope you will be able to meet them in person once the pandemic subsides.

Despite changing and unusual market conditions, the Somar organization continued to execute flawlessly. Market conditions were interesting throughout the year with a lot of crosscurrents felt by several businesses. First, the pandemic evolved through several major twists and turns. We started the year with vaccinations kicking off in multiple geographies fueling hope of an end of the pandemic restrictions by the summer. The emergence of the Delta variant in the summer and Omicron in December quashed those scenarios. Second, we saw the emergence of bubbly pockets in the markets. These created collateral damage around funds that were short the so-called “Meme Stocks” as well as funds investing in companies bought with leverage by the Archegos family office. Third, the second half of the year saw the emergence of conditions that have been thought to be things of the past: rising inflation and supply chain disruptions. While there is still debate over the magnitude and length of their impact on the economy in general and business in particular, Somar is following these closely to not only manage our risk exposure but also position the portfolio to thrive in these conditions.

Despite the crosscurrents in the market and in the world, our portfolio risk was under control throughout the year and followed our expectations. We adapted to the changing conditions. We took the opportunities it offered us. This is another encouraging aspect that we will look forward to building on for 2022.

We look forward to 2022 with confidence. Our short process has significantly improved, and the results are showing that. It provides a strong base to build the portfolio for 2022. Our long investments are thriving with their customers: they have built their leadership position and are on-track to deliver on our expectations. This performance is not reflected in a linear way in the markets. This sets up well for years to come. We have the best team we ever had in Somar’s history. I look forward to updating you on our progress throughout 2022.

 

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Disclaimer: This website is for general information purposes only and is not intended to be, nor should it be construed as investment advice, nor a solicitation or offer to buy or sell any securities, related financial instruments, or  interests in the Somar Master Fund, LP (the “Fund”) or its feeder funds. The information contained herein is not complete, and does not contain certain material information such as disclosures and risk factors about the Fund or its feeder funds. Opinions expressed are current opinions as of the date of this material only and are subject to change without notice.Hedge funds: (1) often engage in leveraging and other speculative investment practices that may increase the risk of investment loss; (2) can be highly illiquid; (3) are not required to provide periodic pricing or valuation information to investors; (4) may involve complex tax structures and delays in distributing important tax information; (5) are not subject to the same regulatory requirements as mutual funds; and (6) often charge high fees. 

 

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