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Game Creek Capital’s Picks Beating The Market in 2019

Inan Dogan, PhD

We talked about Game Creek Capital about 8 months ago. Game Creek Capital is founded by Scott Mayo and taken over by Sean Murphy after Scott's death in 2010. Before Game Creek, Sean Murphy cut his teeth at Vardon Capital Management as a senior analyst covering telecom, media, and consumer stocks. Murhpy has a B.A. degree from the University of Notre Dame. You can read more about Murphy's background in this article. We also summarized Game Creek Capital's strategy as follows in the same article:

"Game Creek Capital employs an absolute return, long/short strategy mainly investing in the business from media, consumer, and telecom sectors. It uses bottom-up research to recognize companies that are currently undervalued. It invests in both mid and large cap stocks. According to its website –  capital preservation is their mantra. When analyzing a potential stock for its portfolio, Game Creek Capital reaches both current and former employees, customers, suppliers, competitors, and of course, the management team. It collects all data possible, trying to get the detailed picture of each company, in order to make a proper evaluation of it. At the end of June 2017, Game Creek Capital held $354.00 million in regulatory assets under management.

From January 2008 through May 2011, one of the fund’s long-short strategies delivered a compounded annualized return of 17.8% (or a cumulative return of 75.2%). Its Game Creek Fund, L.P. gained a great 19.70% in 2013, which was followed by a loss of 4.58% in 2014. Then, the next year, Game Creek Fund, L.P. came back on its feet posting positive returns of 3.23%. In 2016 it delivered 0.73%, and in 2017 it brought back 2.81%."

As you may have noticed Game Creek's return volatility is extremely low. It seems like Game Creek really focuses on capital preservation. We can also see this from its 2018 returns. While the S&P 500 Index lost close to 5% in 2018 (included dividend payments), Game Creek managed to eke out a small gain of 0.42% in 2018 and this is after its 1.5 percentage points of annual fee. The fund also returned 5.4% during the first half of 2019. Its beta relative to the S&P 500 Index is 0.26. This means the fund is about 75% hedged. When we look at the performance of Game Creek's 13F stock picks, we see why the fund was able to deliver positive returns in 2018.

Game Creek's top 5 positions heading into 2019 were Alphabet Inc. (NASDAQ:GOOGL), Comcast Corp (NASDAQ:CMCSA), Hess Corp (NYSE:HES), General Motors, and United Airlines Holdings, Inc. (NYSE:UAL). The picture didn't much during the first and second quarters except Murphy cut its Alphabet Inc position by 15% during the Q2. However, Murphy reversed course in Q3 and boosted his Alphabet Inc stake by 42%, making it his largest stock position. Overall the fund's 13F stock picks that have at least $1 billion in market cap returned a cumulative 25.4% through the end of September and outperformed the S&P 500 ETFs by 4.8 percentage points. Its Q3 return was only 2.8% (one percentage point ahead of the S&P 500 ETFs).

This tells us that even though Game Creek's long stock positions generated roughly 22-22.5% return during the first half of the year, its fund was able to post gains of only 5.4%. There are two main reasons for this and this why we believe Insider Monkey's investment approach is better than investing directly in hedge funds. The first reason is Game Creek is 75% hedged. Since the S&P 500 Index gained 20.4% during the first half of the year, Game Creek's hedges probably erased 15 percentage points from its gains. Second, Game Creek charges an annual management fee of 1.5% (0.75% for 6 months) and performance fees of 20% (1.4 percentage points for gains of 7%), its raw return of 7-7.5% drops to 5.4%.

At Insider Monkey we get imitate the best stock picks of the best performing hedge fund managers, and we don't have to pay an arm and a leg for these picks. The 20 most popular stocks among hedge funds (click for Q3 rankings and see the video below for Q2 rankings) returned more than 37% during the first 11 months of 2019 and outperformed the S&P 500 ETFs by 9.9 percentage points so far this year. This is nothing to sneeze at. Let's take a look at Game Creek's portfolio heading into Q4 and its performance during the same period. Video: Click the image to watch our video about the top 5 most popular hedge fund stocks.

5 Most Popular Stocks Among Hedge Funds

Game Creek's biggest positions heading into Q4 were Alphabet Inc (NASDAQ:GOOGL), The Kroger Co. (NYSE:KR), AT&T Inc. (NYSE:T), Hess Corporation (NYSE:HES), and United Airlines Holdings, Inc. (NYSE:UAL). Sean Murphy allocated about 5% of its 13F portfolio to Alphabet Inc, the biggest position. Murphy's entire 13F stock picks returned about 4.5% in October and November, bringing his 11-month performance to roughly 31.1%. As you can see this is still about 4 percentage points better than the performance of S&P 500 Index. Game Creek's actual returns on the other hand are probably in single digits due to the reasons we discussed above.

Disclosure: Long AT&T. This article is originally published at Insider Monkey.

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