Gratia Capital is a Los Angeles-based multi-strategy, value, and event-oriented hedge fund. It was founded seven years ago by Steven Pei, a former Vice President at Canyon Capital Advisors. To form his own investment advisor, Steven Pei got the seed money from Geoffrey Raynor’s Investment in the amount of $25 million. Steven Pei is the fund’s current CIO and Managing Member, and among his other investment experiences worth mentioning was his employment at Bain Capital where he was an Associate, also at DFI Holdings where he was Senior Associate, and at McKinsey&Company, where he worked as an analyst. He graduated from the University of Pennsylvania in 2000.
Over the years the fund has grown, and on December 31, 2016, it reported managing around $492.69 million in assets on a discretionary basis. Gratia Capital mainly chooses stocks belonging to these three sectors: Real Estate, Consumer, and Industrial. When picking up the stocks to invest in, the fund relies both on its in-house and external research. Among the fund’s clients are foundations, endowments, consultants, and family offices. “The firms’s fundamental strategy is to combine the advantages one typically gets in a sector specialist (a PM well-versed in the sector, strong context for relative value within the sector, and the ability to be forward-thinking) with the flexibility of a generalist (the two biggest drawbacks of a sector specialist are lack of relative value context and constraint of the investment mandate when opportunities arise outside the core expertise).”
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Let’s take a look at some of the fund’s return figures in recent years, in order to examine what has this strategy brought back.
Its Gratia Capital Partners Master Fund Ltd. delivered big 19.92% in 2013, followed by 5.43% in 2014 and 5.79% in 2015. It continued to deliver positive returns in the next couple of years, bringing back 3.80% in 2016, and even better 8.82% in 2017. Facing 2018 challenges, it generated a loss of 7.28% last year through October. Its total return was 62.59%, for a compound annual return of 7.76%, while its worst drawdown stood at 14.20.
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At the end of the fourth quarter of 2018, Gratia Capital 13F portfolio had a market value of $56.58 million, down by 63.08% from one quarter earlier when it was valued at $158.68 million. After the fund had dumped around 9 companies and added 3 new positions, its portfolio counted around 15 long holdings. Focusing on already mentioned specific sectors, the fund didn’t hold a single stake in any of the 30 Most Popular Stocks Among Hedge Funds in Q4 of 2018. Nevertheless, its top picks and fourth-quarter investment moves were very interesting, as the fund initiated the biggest new position in SPDR S&P 500 ETF Trust (NYSEARCA:SPY). Gratia Capital purchased 96,800 SPDR’s shares with a value of $24.19 million, which comprised 41.29% of its 13F portfolio.
Among 9 stocks the fund decided to drop during the last quarter of 2018, the biggest positions held in Whirlpool Corporation (NYSE:WHR), Houghton Mifflin Harcourt Co (NASDAQ:HMHC), and Masco Corp (NYSE:MAS). The fund said goodbye to 71,000 Whirlpool’s shares, which carried a value of $8.43 million, to 880,086 shares of Houghton Mifflin Harcourt, which were valued at $6.16 million, and to 129,708 shares of Masco Corp with a value of $4.75 million. The fund also dropped its position in Owens Corning (NYSE:OC), which counted 63,600 shares with a value of $3.45 million.