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The hedge fund that's beaten Woodford twice

Small US hedge fund Kerrisdale Capital has been on the winning side of two high-profile clashes with Neil Woodford.

 
The hedge fund that's beaten Woodford twice
 

Few UK investors would have heard of Kerrisdale Capital three years ago, but after two high-profile victories against Neil Woodford, the small New York-based hedge fund is getting a name for itself on these shores.

The collapse in the shares of Prothena (PRTA.O) this week after the failure of its flagship drug has richly rewarded Kerrisdale, which was 'shorting', or betting against, the stock, and punished Woodford, the biotech company's biggest investor. 

Kerrisdale labelled Prothena ‘the next big biotech blow-up’ in November as it announced its short on the stock, claiming the shares could fall as much as 80% and saying it was ‘certain’ of the failure of NEOD001, a potential therapy for AL Amyloidosis, a rare disease caused by the build-up of amyloid proteins.

Less than six months later, Kerrisdale has been vindicated. Prothena has ceased further research into the drug after the failure of the phase 2b Pronto study into the treatment. The shares are down 82% since Kerrisdale started shorting them.

It’s the second time Kerrisdale, a small hedge fund operation running around $150 million (£108 million) in assets, has taken on Woodford, who ran £17.8 billion at the last count.

In 2015, Kerrisdale launched a short-selling attack on long-term Woodford holding Allied Minds (ALML), branding the company, which commercialises intellectual property from universities, ‘a dressed up collection of high-risk, low-reward gambles’ and saying the shares could fall by ‘at least’ 70%. Three years on, the shares are down 78%.

Both episodes have delivered major blows to Woodford’s funds. Allied Minds was a top 10 holding when Woodford launched his Woodford Patient Capital (WPCT ) investment trust in 2015, and sat just outside the top 10 when he launched his Woodford Equity Income fund a year earlier.

Over the three years to the end of March, no stock has weighed more heavily on the performance of his Woodford Equity Income fund than Allied Minds, in a period that has also feature heavy share price falls from holdings like Provident Financial (PFG), Capita (CPI) and AA (AAAA). 

Prothena’s impact on the Woodford Patient Capital investment trust has been even more dramatic. Prothena was the trust’s largest holding when Kerrisdale launched its attack, representing a huge 16.3% of the fund's assets, although that had fallen to 9.1%  by the end of March. The stock’s 69% collapse on Monday saw shares in Woodford’s trust tumble by more than 10%.

The Woodford Equity Income fund, which held a 3.1% stake at the end of last month, and the Income Focus fund, with a 1.8% holding, have also been dented.

Prothena’s fall is likely to sting all the more for Woodford given Kerrisdale was a beneficiary, following the war of words between the two.

Woodford branded Kerrisdale’s Allied Minds attack as ‘opportunistic’, going further after the hedge fund took aim at Prothena.

‘Their job is to scare the market when the market is prepared to be scared. It doesn’t matter if what they said about Allied Minds and Prothena is totally inaccurate and unsubstantiated,’ he said earlier this year.

‘What matters is Bloomberg and others giving them the oxygen of publicity and hey presto there is a self-fulfilled prophecy and the share price falls.’

Kerrisdale had in turn gone on the attack against the UK’s most famous fund manager, arguing in its 29-page report on Prothena that investors should be wary of Woodford’s ‘repeated large mistakes in the biotech sector’.

On Twitter, Kerrisdale claimed Woodford would ‘lose money on your bad investments regardless of whether we write on them. But hopefully our work helps the widows and orphans who invest in your Patient Capital trust recognise how poor your diligence is on the stocks you pick’.

'We tend to be right' 

Speaking to Citywire following Prothena’s announcement, Kerrisdale founder and chief executive Sahm Adrangi (pictured) took issue with Woodford's claim that the stocks they had targeted had fallen as a result of the short-selling noise they had created.

‘I think we have a good track record,’ he said. ‘We tend to be right. We are taking a lot of firepower to a very small number of situations.

‘We only publish five or 10 times a year. [The team] don’t have to monitor 100 stocks. They don’t spread themselves too thin.’

He said he had been surprised by the lack of engagement from Woodford in the arguments Kerrisdale had been making about Prothena.

‘If someone publishes short on one of our longs – we would have definitely gotten on the phone to them,’ he said. ‘The nuttiest thing of all is we explained in excruciating detail.’

Performance of Adrangi’s small Kerisdale Partners hedge fund has been spectacular since launch, with the fund up by more than 1,800% since launch in September 2009, according to data from Lipper.

Much of those stellar returns were delivered in the early days of the fund, when a series of bets against Chinese internet stocks delivered.

Over the last five years, returns have been less stratospheric, but still strong, with the fund having more than doubled investors money over the period.

Not every short has worked, as Adrangi admits. ‘We’ve made mistakes – there are companies we publish on that have got bought out.’

A short on mobile communications group Straight Path Communications (STRP.N) stands out - the shares surged 150% after a bid from AT&T, although Kerrisdale closed the small position before a bidding war helped the shares double again.

With Prothena now behind, it Kerrisdale has now moved on to its next target, Florida real estate company St Joe (JOE.N)

Woodford has pointed to the value of the company's other drugs in its portfolio, which include a drug for Parkinson’s being developed in partnership with Swiss pharmaceutical giant Roche (ROG.S) and the treatments for neurodegenerative diseases it is working on with Celgene (CELG.O).

But as shown by Monday’s fall, the market doesn’t agree: it had ascribed the bulk of Prothena's value, which stood at $1.5 billion last week, to NEOD001, which has now failed. Analysts covering the stock, agree, having slashed their price targets after Monday’s news.

Adrangi has little to say on Prothena’s future without NEOD001. ‘We don’t have a strong opinion on that. We understand that most of the value has been ascribed to that drug,’ he said.

11 comments so far. Why not have your say?

Novgorod

Apr 25, 2018 at 17:49

Christ! This is like financial warfare.

Basically, Kerrisdale spotted a sucker in the market & took full advantage of the situation.

They made Woodford look like a complete mug.

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Franco

Apr 25, 2018 at 18:43

Woodford's abilities have been vastly overstated, so much so that he started believing them himself.

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Tyrion Lannister

Apr 25, 2018 at 19:03

Mmmm...

I bought WPCT and sold at a small loss. I was also at the time in his equity income fund which I sold at a small profit to buy his equity income focus fund, primarily because it was income I was really interested in and it was aiming at 5p/share. A small profit so far. Then....

The 5p/share wasn't delivered and the capital is down over 5%. I know Woodford is supposed to be a long term bet but he's woefully underperformed over the last 3 years, the short term underperformance, as he called it, is turning (has turned?) into the long term.

I'm going to hang on to the income focus fund in case it does turn around, only because it's less than 4% of my portfolio. You're not getting any more money from me Neil, but how about giving me the return you promised?

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King Lodos

Apr 25, 2018 at 20:26

I still say equity income's the worst trade to be in .. Demand for yield created by central banks pushes valuations up in relative terms.

Then when you take these stocks that are still yielding >4-5% (i.e. that haven't risen with the tides) what you're left with is high uncompensated risk .. I'm calling it a 'risk bubble'.

Woodford's no idiot – but his investments have been behaving like distressed investments, and I think for good reason .. Risk doesn't necessarily show up in accounts, and hedge funds tend to do a little more groundwork

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Tony Airey

Apr 25, 2018 at 21:08

Genuine question...is NW fishing in waters he doesn't understand, or has he just been unlucky?

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JoeV

Apr 25, 2018 at 21:11

I think to invest over 15% of capital in just one biotech company is just a gamble. At most it had a 50% chance of paying off. Does NW get professional (expert doctors) advice. It was becoming clear that the NEOD001 study was almost certainly going to fail months ago. Yet NW remained very optimistic. It is very likely that PRX002 study will fail. Several similar drugs, which were tried for Alzheimer Disease have failed despite encouraging Phase 1/2 studies.

I still cannot understand how an astute investor, with a team of advisers, could invest in a company like Industrial Heat, trying to make huge amount of energy from cold fusion. This has been discredited by all competent physicists. This was the final straw that made me sell WPCT at a small loss.

I think that some investors are good at investing in Blue Chip companies. Others are best at small companies. Definitely NW has not done well at start ups!

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Tyrion Lannister

Apr 25, 2018 at 21:36

JoeV, it was Industrial Heat Investment that convinced me to sell, also at a small loss. We probably sold around the same time.

I ended up with his Income Focus fund, thinking that it was a return to his strengths - that too has proved to be a mistake!

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RichardK via mobile

Apr 25, 2018 at 22:16

Kerrisdale is right, if Woodford has taken the time to read their research report it would have been stinkingly obvious that something was wrong with the trial. He either didn’t do his due diligence; was totally duped by the CE of Prothena, or was so deep into the share that he had no choice but to drum up support for it when the report came out. Made quite

a bit of money on the early short environment but sadly got out before this week’s bonanza

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albion

Apr 25, 2018 at 23:40

Woodford mentioned everyday so far this week on Citywire Money Daily Summary. Can we expect more for Thursday and Friday?

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colin overton

Apr 26, 2018 at 08:35

Joe V, At one time Prothena was well over 20% of WCPT (so ~£200 million in one company!). This was due to growth at the time, but perhaps Old Neil hasn't heard of risk management or asset rebalancing? To allow one small company to dominate a medium sized mutual looks like either stupidity or massive over confidence.

"The hedge fund that's beaten Woodford twice". Old Neil hardly needs help in this regard, he can manage this himself. Prothena was/is in all his investment vehicles, he must own quite a high percentage of this small, now much smaller company. As others have said, how Prothena figures in income UTs is a mystery only known to Woodford.

By the way, Woodford still seems to think (that is after Monday's news) that Prothena is worthy of investment, but few others do. Woodford's stock picks in WCPT have been a disaster. After 3 relatively benign years, he has lost 25% of the launch price, an achievement that others have found it difficult to match over this period. Prothena is held in such low regard that by some calculations its share price is below its book/net cash value. Truly a great stock pick. And as a cursory glance of the financial news over the last year or so would tell you, Old Neil was warned that Prothena is/was a lemon.

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Jeremy Woodhouse

Apr 26, 2018 at 11:14

Why is Woodford so obsessed with the biotech sector? Kerrisdale is correct in stating " Woodford has poor diligence in the stocks he picks " How many more times is he going to have his fingers burnt? I used to be a huge fan of Woodford but sadly no more.

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