Landmark Capital Partners' Small/Mid Cap Long/Short U.S. Equity Fund is boosting returns with a synthetic short strategy. The fund invests in put spreads to limit the fund's exposure to a potential short squeeze. It generally buys and sells short-dated puts--no longer than 60 days--which further limits the risk of the fund being exposed if a stock price jumps suddenly, according to investor documents.
This spring, Landmark put the strategy to work with options on Hershey stock. The firm's fundamental analysis had the stock overvalued, states the document. Specifically, takeover speculation was inflating the stock price, when in reality the company was likely to be the acquirer instead of the acquired. This uncertainty made a vanilla short position a highly risky endeavor. With the stock trading around 64, Landmark bought April 65 puts for 2 and sold the April 60 puts at 0.60, for a combined 1.40 per contract in the combined option position. The share price dropped to 60.50, at which point they unwound the trade, selling the long position for 4.60--a profit of 2.60 per contract--and repurchasing the short position for 0.80--a loss of 0.20--for a net gain of 2.40 per contract. This way, the fund was able to capture about 70% of the downside move in less than three weeks and without exposing itself in the case of a run-up in the price of the stock, states the document. Steven Riccio, partner and portfolio manager, declined comment.
