The Gist 

Going into the COVID-19 pandemic, Massif Capital is one of the few lucky hedge funds who are in a position to deploy cash to pick up assets at bargain prices. Coming off the back of a 3.3% gain in Q1 of 2020, driven by a 77.8% gain in their short position in Norwegian Cruise Lines (NCHL), the fund added 13 new positions in January and February of 2020. Massif capital is a long-short hedge fund that focuses on Basic Materials, Energy and Industrial businesses.

In the quarters ahead, the company is looking to opportunistically pick up more assets on the long side of their portfolio, should prices in the resources and infrastructure sectors get further depressed. To strategically manage further entry into the market, the company is taking a critical look into how consumer demand will evolve in the next few months given the complexity of the impact of COVID-19: 

Looking ahead, it will be essential to try and untangle how much demand is being deferred vs. how much demand is being destroyed. The second question is how much production is being placed on hold vs. how much production is being permanently shut down. Production capacity can often be quite inelastic given cost implications and time-to-build issues that we have discussed at length through the lens of capital cycle analysis.

With that said, the fund is ultra-cautious on some sectors such as Oil & Gas, while cautiously optimistic on others such as alternative energy and basic materials. See more  information on their market positions, and investing perspective in their most recent newsletter.

Oil & Gas Concerns Warranted 

The concerns about the Oil & Gas sector appear to be well founded at this time, given the decline in oil prices and the amount of excess supply that is on the market. Oil prices have remained depressed since the double impact of reduced demand due to the spread of COVID-19, and higher supply as the conflict between Saudi Arabia and Russia about supply restrictions escalated. 

The negative sentiment about oil and gas was echoed by Oil Man Jim Company in his podcast.

Where do we go next...

Over the coming months, there will likely be a number of bankruptcies across a broad cross-section of the global economy, as ​COVID-19 leads to continued low cashflows and balance sheet stress.  Many of the companies that will go into financial difficulties will be businesses with solid operating models, but in need of financial restructure. This presents a good opportunity for hedge funds who are good at separating the wheat from the chaff.