August 16, 2018
Dear DD1 Partner,
I am writing to tell you that this month’s (and year’s) DD1 performance has not been acceptable to us, and we are making significant changes to our strategy. We have done very well buying distressed bonds, but at the same time we moved into defaulted bonds like North Atlantic Drilling and Cumulus Media (as both had indicated strong levels cash flow at the time we stepped in), with the belief that both the oil market and Cumulus Media would recover.
We realize that these two issues have subsequently hurt unitholders significantly (including myself, as one of the largest holders of these two securities). We have also come to realize that many of the high-yield bonds we purchased at a significant discount have, as they appreciated in principal value, also experienced an extraordinary appreciation in the issuer’s stock prices (especially as the company’s bonds moved closer to PAR value).
One component of our new strategy for DD1 addresses these types of missed opportunities in phenomenal equity appreciation is to exit the company’s bonds once we have “ridden the ride” (so to speak), and re-deploying the capital into the stock of the debt issuer. This will, of course, be taken on a case-by case basis and considered with the utmost care and diligence. We believe this should provide the opportunity to not only earn outstanding returns on distressed bond issues which have made a turnaround, but to capture part of the explosive growth potential brewing within an issuer’s stock as they become healthier companies. Afterall, if we liked the bonds after the company made the “turn”, then why wouldn’t we like the stock of that same company if the trend continues? Again, this will be considered on a case by case basis… and not all will make the cut. However, we feel this is a significant and much needed adjustment from our past strategy for DD1, and we see this as an integral step in providing the returns that you have come to expect and deserve.
We have already begun to implement changes to our approach, and I have more confidence that ever that we can once again be among one of the Nation’s top performing Hedge Funds. Consequently, I have contributed even more of my personal capital to jump-start a new and improved strategy that is more in-line with the outstanding returns and performance that our clients have become accustomed to (and the standard we hold ourselves to).
Due to the underwhelming performance of DD1 this year, we have made the decision to waive any and all management and performance fees related to DD1 accounts for all existing DD1 Clients for the remainder of this year (2018).
We have a new and strengthened faith in our revamped strategy for DD1, and ask that you will accept the waiving of DD1 fees as a sign of good faith, with the hope that you will continue to place your trust in our management and new strategy as we work diligently to find and achieve the high returns in DD1 that we have all come to expect over the years.