Sun Valley Gold returned 56% in Q2 2019, tops among all hedge funds.* But the 13F-based performance comes with an asterisk.

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Sun Valley Gold led all hedge funds in Q2 of 2019 with a 56% 13F-based return. But the eye-popping performance by the Ketchum, Idaho-based fund comes with an asterisk, as explained below.

Ketchum-based Sun Valley is a materials-focused hedge fund managed by Peter F. Palmedo, who founded the firm in 1999. According to Sun Valley’s ADV filed with the SEC, the fund “generally invests in gold, precious metals, mining securities, rights, warrants, and options relating to gold and precious metals, and engages in all activities incidental and related thereto…”

More from the ADV:

“The Adviser engages in a fundamental value investment strategy wherein the Adviser attempts to invest in asset-oriented securities that the Adviser believes are undervalued by the market. The Adviser employs seasoned analysts with experience in geology, mine engineering and mining finance and accounting. The research analysts maintain the Adviser’s proprietary fundamental valuation database,
using information from due diligence visits to resource properties and companies throughout the world, the application of economic parameters, and the construction of zero-based models to determine fair value. The fundamental valuation database consists of company models with the following components: (i) a geological component, (ii) an operational component, (iii) a financial component, and (iv) a corporate finance component.”

Sun Valley Gold’s portfolio was leveraged at over 2X

For starters, we know there is something interesting going on when Sun Valley Gold’s assets under management (AUM) are disclosed as $544 million, but the 13F filed by the hedge fund shows $1.3 billion in managed 13F securities. Obviously manager Palmedo is leveraging his AUM. Apparently, using greater than 2X leverage.

Sun Valley Gold’s Q2 13F disclosed a $1.1 billion position in SPDR Gold Trust (GLD) put options–a position that would profit from a drop in GLD. Q1 had shown an $889 mil position in GLD puts and $212 mil in GLD calls, as the fund’s top two positions.

So, the hedge fund is employing long-short option strategies, in addition to leverage. However, the rest of Sun Valley’s portfolio was long high-beta gold and silver stocks. It’s a hedged portfolio — short the gold index via GLD puts, long some GLD calls and long gold and silver equities.

The gold stocks in Sun Valley’s portfolio surged during Q2, as gold hit six year highs.

SPDR Gold Trust (SPDR) 7 year weekly chart. Source: Interactive Brokers

The SPDR Gold Trust was up 17% from May 15 through August 15, as gold hit six year highs. The GLD puts, which profit if gold goes lower, obviously lost money. However, the long stocks in Sun Valley Gold’s portfolio surged. Below is the quarterly % profit for securities held in Sun Valley Gold’s portfolio on May 15, when Q1 13F’s were filed.

Sun Valley Gold option and stock 13F positions as of May 15, 2019 and % change over during Q2:

Stock Shares Held Market Value % of Port Rank % change
GLD(PUT)7,288,300$889,245,000 73.161?
GLD(CALL)1,744,600$212,859,000 17.512?
AGI6,602,237$33,541,000 2.76353.98%
IAG4,633,046$16,073,000 1.32420.13%
VGZ18,622,544$12,708,000 1.05532.85%
AKG19,873,138$12,508,000 1.03645.47%
SSRM892,166$11,295,000 0.93737.05%
PVG944,453$8,082,000 0.66869.35%
MAG547,993$5,859,000 0.48926.75%
GOLD391,415$5,366,000 0.441049.12%
EGO835,737$3,864,000 0.3211138.30%
WPM135,689$3,234,000 0.271225.02%
ALO1,262,062$917,000 0.081331.65%

Usually, funds are not required to include options and other derivatives in 13F filings. However, the options of some indexes are included in the SEC’s List of Section 13F Securities, as is the case with GLD options. However, WhaleWisdom’s backtester does not calculate option positions reported in 13F filings, as the filer does not report options specifics, such as strike price, expiration date.

So we don’t know what Sun Valley Gold’s exact option strategy was during the quarter. But, given that GLD lost 17.4% over the period, and GLD puts were a large position for the fund, we can assume that investors in the Sun Valley Gold hedge fund did not realize a full 54% return net of hedging.

In any case, an investor copying Sun Valley Gold’s stock picks last quarter would have done very well.

Disclaimer:

Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this blog is meant for educational and informational purposes only. Do your own research before investing and don’t risk more than you can afford to lose. This article expresses my own opinions, and I am not receiving compensation for it (other than from WhaleWisdom). I do not have a business relationship with any company whose stock is mentioned in this article. I or my associates may hold positions in the stocks discussed.