I have been trying to figure out how Hudson Bay Capital Management has beat the market over the past few months. Although I know that its favorite sector is Intellectual Property (IP), which been performing well recently, I also know that there is more to great investing than sector selection. As my research progresses, I am becoming convinced that Hudson Bay has mastered a strategy of inflection point investing that fuels its market-beating performance. I will explain this concept in this article with several case studies.
Hudson Bay's managers understand that a corporation's securities have a tendency to stagnate. Low volatility is the natural state of most securities. Not only will common shares stagnate, but a corporation's bonds, warrants, rights, debentures and other types of illiquid securities might not trade for days or weeks. Obviously, if price is not moving up, Hudson Bay is not making a profit.
Because of this, my initial research has shown that Hudson Bay prefers to invest at rare and highly volatile inflection points in a corporation's life. Specifically, I find that one of Hudson Bay's bread-and-butter strategies is to invest in companies just before they announce a brand new IP-based business operation.
Some examples with hyperlinks will help to illustrate this concept. Notice how Hudson Bay enters the picture precisely before the company announces new IP and/or a fresh subdivision.
- Years prior to March 2012: VRNG stagnates, falls in price
- June 8, 2011: Innovate/Protect is born
- December 2011: Hudson Bay discloses that it owns all convertible preferred of Innovate/Protect- enough to control the company on demand
- March 12, 2012: VRNG enters into merger agreement with Innovate/Protect
- March 2012-October 2012: VRNG rallies 400% in 6 months
- Decades prior to February 2013: SPEX declines 99% from dot-com era highs
- February 13, 2013: Hudson Bay announces a 7.47% stake in SPEX.
- February 22, 2013: SPEX announces a merger with IP owner North South Holdings
- February 22-28, 2013: SPEX rallies 140%
MARATHON PATENT GROUP (OTC:MARA)
- Inception to December 2012: MARA stagnates, declines in price
- December 2012: Hudson Bay discloses a 3.5 million share stake in MARA
- March-May 2013: MARA launches new IP businesses, rallies 30%
MGT CAPITAL INVESTMENTS (MGT)
- Decade prior to May 2012: MGT declines 99% from all-time highs
- May 24, 2012: Hudson Bay invests millions in MGT debt
- June 1, 2012: MGT selects top-tier law firm to pursue its IP infringement claims
- October 2012: MGT repays Hudson Bay's convertible note in full, announces reorganization, rallies 100%
WORLDS INC. (OTC:WDDD)
- 2008-2013: WDDD trades in a range, declines in price
- Early 2013: Hudson Bay co-leads a $2.3 million debt financing in WDDD
- March 30, 2013: WDDD files an IP lawsuit against Activision (ATVI)
- January-May 2013: WDDD rallies 100%
Although the above outline purposefully oversimplifies the companies' histories and Hudson Bay's investments, the trend should be clear. Hudson Bay gets involved precisely at the companies' inflection points: pivoting business models, acquiring IP and/or reorganizing assets. It also tends to get involved at times when companies are in need of short-term financing to get through a critical period of operations.
Of course, Hudson Bay is not the only capital fund working with corporate reorganizations; its competitors number in the hundreds, if not thousands. On debt notes, it is simply looking to gain full principal repayment and a high-single-digit return. On sweeteners like warrants and rights, it is looking for upside to offset default on other investments. It is simply differentiating itself by, well, consistently timing so many investments correctly.
In all, Hudson Bay's inflection point strategy seems to be working, and its managers certainly have an uncanny ability to ramp up investment just prior to the "second wind" in otherwise uninspiring corporate lives. For example, I am a shareholder of MGT Capital Investments entirely due to its daily fantasy sports business, which launched just a few days ago and within a few months of Hudson Bay's involvement. Likewise, since Hudson Bay kick-started Marathon Patent Group's corporate reorganization, the company has been issuing daily progress reports and just revealed that it is probably cash flow positive (if the announced 33rd settlement is anything like the previous 32). Although Hudson Bay certainly has its share of losing investments, if it continues succeeding at this inflection point strategy, I will be anxiously monitoring its SEC filings to try to profit from its upcoming decisions.