Hand it to Ryan Packard. Two years after being named one of ten Institutional Investor Hedge Fund Rising Stars, he is still a manager worth watching.
The founder of Hiddenite Capital Partners was up 48.5 percent for the year through August and 56 percent through mid-September after gaining more than 15 percent in 2023.
As he approaches his firm’s four-year anniversary on October 1, Packard has compounded at 17 percent per year, net of fees, through mid-September.
“We have witnessed a continuation of the rally that commenced in Q3 ’23 and further evidence that we have entered the first inning of a generational reallocation of value . . . to the core industries that Hiddenite invests in,” Packard noted in his first-quarter client letter, obtained by II.
Hiddenite, named for the city in North Carolina where Packard lived for part of his childhood, mostly emphasizes old-economy stocks in industrials and materials, energy, financials, and technology. Since the firm’s inception, 80 percent of returns came from those old-economy stocks, with just 18 percent from tech and none from the Magnificent Seven.
There are three keys to Hiddenite’s success, according to Packard. First, the firm takes a multisecurity approach — investing in equities, credit, and options — which he believes is an important differentiation. Eight of Hiddenite’s ten best all-time positions were from multiple securities in the same name.
Packard also credits what he calls macro awareness. For example, in mid-2022 he told clients that contrary to the conventional wisdom at the time, he thought it was mathematically impossible to go into a recession.
The options strategy is the third differentiator. Hiddenite, which currently manages about $100 million, uses options to defend the downside and amplify the upside. Packard tells clients that the firm’s ability to buy single-name core positions in equities and then a further 100 basis points of longer-dated call options has impacted results over time. About 35 percent of the fund’s performance in the first quarter and 33 percent in the second quarter are attributable to these investments.
Packard explains in his first-quarter letter that once an idea passes from research into the portfolio management stage, the firm begins “a careful security selection process evaluating the tradable securities in the name” and considers the best risk-adjusted way “to express our investment view in the market.” He elaborates: “Price target, timing, scheduled and forecasted events, as well as the technical setup of the securities markets are a few of the inputs in this process.”
Packard says the firm frequently chooses to own both cash equity and long-dated equity call options in the names it invests in. “Often this mix of securities affords Hiddenite the greatest upside capture while limiting downside,” he explains.
Packard adds that sometimes Hiddenite exclusively owns equity call options in a name: “When this is the case, it’s often due to a technical nuance in the underlying security or market making an options investment disproportionately attractive.”
Options trading, and more important a strong focus on shorting, has also had a huge impact on risk management. The firm has outperformed the S&P 500 in 14 of the 16 down months the S&P 500 has experienced since Hiddenite launched in October 2020, with an average outperformance of 3.4 percent across the 16 months.
Hiddenite’s biggest winners this year are mobile advertising technology company AppLovin, the largest U.S.-listed common stock long position; FTAI Aviation, the firm’s second-largest U.S.-listed common stock long, which owns and acquires aviation and offshore energy equipment for transportation; chip maker and No. 4 long Broadcom; Comfort Systems USA, which provides heating, ventilation, and air-conditioning services; an undisclosed tech short position; and CRH, a provider of diversified building materials businesses and the firm’s fifth-largest common stock long position.
Says Packard in the letter: “We believe that Hiddenite’s distinct investment focus, multisecurity selection process, and tactical risk management are essential to this outperformance.”