Thursday, February 26, 2015

Why I Bought Senvest Capital

I've had trouble finding good values in the Canadian currency portion of my portfolio. In it I owned Andrew Peller (TSX:ADW.A) a Canadian wine producer for the last 1½ years. In that time the stock has returned 15%. However, that is still an overall loss in my "base" currency which is USD. The Canadian dollar depreciated by about 20% in the same period versus the USD.

Wine makers are in a very competitive capital intensive business anyway. I doubt ADW can have outstanding gains in the coming years. Don't get me wrong, it is a decent investment, but nowadays when I make an investment I expect to beat the market.

For this reason, I traded in my ADW for Senvest Capital (TSX:SEC). Senvest Capital is a Canadian investment firm, it owns several subsidiaries. The biggest two are basically hedge funds. One is Senvest Master Fund LP which operates out of New York, and Senvest Israel Partners which invests in Israel. Senvest is a well-known secret in the financial blogsphere. There are numerous writeups about it; I list them below. This article will mostly just summarize what has been written.

Senvest got attention several years ago when it was having very good results and growing equity nicely. I first read the glowing reviews about it 1½ years ago. Since then the the company results have exceeded the most optimistic expectations. The company grew equity from CDN$ 358M in 2012 to CDN$ 630M in 2013. After the first 9 months of 2014 equity grew to CDN$ 684M. The company's 2014 year end results are not out yet, but the fund's results are out. The Master Fund grew by 79% and 22% in 2013 and 2014 respectively. And the Israel Fund grew by 43% and 1%. This hints that the parent company's 2014 results are at least satisfactory. Since inception more than 10 years ago both funds returned more than 20% net of fees!

The parent company Senvest Capital owns 43% of the Master Fund and 48% of the Israel fund. The Master fund is a long/short fund, with about USD$1.4B in over 100 holdings. The fund holdings are known because as a US based company it is required to report its holdings. They are an eclectic bunch of companies with a lot of exposure to tech and pharma/biotech.  SEC does not require funds to reveal short positions but it is around $300M. Whatever the fund is doing is original and excellent. And it is even better that I don't understand it, because if I did I could buy those holdings myself without a middleman.

The Senvest Israel Fund is also attractive investment to me because Israel is an growing and stable emerging market. I have looked into some Israeli companies. But nothing really attractive stood out. And even if I found something, investing in Israel is not easy. The one brokerage that I can use to invest there charges about USD$130 per transaction plus the currency exchange and spread. So, something like the Israel fund is my best way to ride with Israel at a reasonable cost.

The two funds however are still hedge funds, and as all hedge funds, they are expensive. The fee is 1.5% expenses plus 20% of gains as performance incentive fee. I don't think hedge funds in general are a good proposition for that reason. But admittedly, even with that, the Senvest funds have merit.

But there is even more reason that Senvest is a great investment. At the current price of CDN$163, it is selling for 2/3 book! Since I heard about the company, I estimate book value increased by 60% and the share price increased by the same. So in that time the company is equally mispriced. It does appear odd that such a mispricing exists. But I don't fret as to why. As a value investor my job is simply to profit off mispricing.

Seeing as Senvest is a business that makes money from capital gains and dividend income, I found it instructive to see how much of the gains flows back to the Senvest Capital shareholders. The Senvest Capital parent company owns RIMA Senvest Management which manages the investments of the hedge funds and gets the fund's 1.5% and 20% fees. However it keeps only 60% of the fees, the remaining 40% goes to Richard Mashaal whose family owns half of Senvest. So 20%*40%=8% of the investment gains goes to Richard Mashaal as a performance incentive and shareholders can claim the remaining 92% of the gains — for simplicity I ignore salaries and incentives for the other members of the management team. The previous several years report shows that the company's gains are taxed at about 10% rate. This means the shareholder keeps about 82% of the investment gains. And because the stock price is 2/3 of book value, the shareholder gets actually gets 82% ÷ ⅔ = 123% of the investment gains. The following tables compares Senvest Capital stock versus investing directly in the Senvest holdings versus someone who is able to invest in a hypothetical mutual fund that does the exact same thing as the funds and therefore gets the same performance before fees.

Investment in Funds Senvest Capital Mutual Fund
Equity 100% (neglecting expenses)150%100%
Gains 80%123% 100%

Admittedly there is a lot of hand-waving approximations in these calculations. But it shows that the Senvest Capital stock is so cheap that it outweighs the tax penalties of investing through a corporation and the high hedge fund fees.

The biggest risk in this investment, in my opinion, is the performance of the funds. While in theory hedge funds are suppose to hedge the upside and downside, Senvest's funds do the opposite. They are more volatile than the market; the performance will exceed the market during up years and be much worse during down years. That has served the company well in the last two decades, but I fear the funds may suffer some awful permanent loss of capital in a future downturn. But of course the company does have the margin of safety. As well, the company has other investments outside of the hedge funds. For example, it owns unlisted companies as well as REITs. These hopefully will have some uncorrelated risks to the hedge funds. In addition, the rest of my portfolio should have uncorrelated risks from Senvest. I run a relatively concentrated portfolio with about 20 main holdings. And as such I consider risk management paramount.

Below are some useful articles on Senvest.

A recent Barron's article. An earlier Barron's article.
A dated article by oddballstocks
Value Investors Club 2014 article.
Barel Karsan 2015 article.


  1. Thanks for writing about interesting ideas.
    In your calculation: Why are you ignoring outside money in the funds? If Senvest receives 60% on 100% of the fund and has <50% stake, this at least cancels each other out.

  2. Hi Martin, the 60/40 split is how to divide up the fees from managing the funds, irrespective of who are the investors in the fund. Say the funds have $200M gains before fees. The fees should be about $40M (20% portion) + $30M (1.5% portion). 40% of this 70M goes to Senvest and the rest goes to Richard Mashaal.


    1. Are you sure about this? I spent some time today looking at this with a fellow investor. If you check the 2013 proxy ( you see that Richard Mashaal only earned $12m in 2013. This coincides roughly with 40% from the 1.5% + 20% structured charged _only_ over the 'liabilities for redeemable units' a.k.a. outside investors, who had $190m invested at the start of 2013. Total fund size was $330m, if they would have charged fees over that amount Richard Mashaal would receive much more.

      It is even easier to check for 2012, in that year management fees weren't consolidated yet. Our conclusion is that RIMA only charges fees for outside investors, not for the money that Senvest itself has invested in these funds. In that case Richard Mashaal should receive a much higher fee (total fund AUM was 660.

      The way I see it this investment becomes even better: 1) they don't charge shareholders and 2) you receive 60% from the fees charged to outside investors.

      I might be mistaken though.

    2. Hi Writser,

      Firstly, no I am not 100% sure, I could be mistaken.

      This is what I understand from the 2013 Annual report. The report says that Richard Mashaal gets 40% of RIMA's fees. It doesn't say anything about fees only to the outside shareholders. If what you say is true I think they would've clearly that out. Also, RIMA is own in part by Richard Mashaal, and his portion is counted on the books as minority interest, as explained by the following:

      The Company consolidates the RIMA Senvest Mangement
      LLC, entity that serves as the investment manager of Senvest
      Partners and Senvest Israel Partners. The portion of the
      expected residual returns of the entity that does not belong
      to the Company is reflected as non-controlling interest on
      the statement of financial position. This non-controlling
      interest is owned by an executive of the Company and
      totalled $64.9 million as at December 31, 2013 from $27.4
      million as at December 31, 2012.

      So I think that's how they arrive at the 40% figure. He made 12M and an additional 64.9-27.4=37.5M.

    3. You are correct on them not mentioning this structure in the AR. That would be a bit strange indeed.

      But according to IR: "The amount on the proxy reflects what was earned in the current year. The non controlling interest reflects this but also includes past fees that have been re-invested in the funds and what these re-invested earned in the current year".

      If I understand correctly Richard Mashaal really earned only $12m in fees in 2013 so total fees earned by RIMA are $30m for the year - which is much too low if they charge fees over total AUM. The other $25.5m is the increase of value of RIMA's stake in their own funds.

    4. Mgmt confirmed that they only charge fees to outside investors.

    5. Thanks writser, cos of your info I bought more shares!

      ps. I am out of Fujimak

    6. Just figured it out myself too, thanks to your blogpost .. Why did you sell Fujimak?

  3. I meant 60% of 70M goes to Senvest.....