A closer look into one Canadian hedge fund’s triple-digit year

While most hedge fund industry giants have had mediocre performance in 2020, one small fairly concentrated hedge fund strategy has reported gains of over 100% through September. Matthew Zabloski, founder and portfolio manager of Delbrook, attributes the portfolio success to the firm’s location, pent up commodity demand and an expanding opportunity set surrounding mining and metals over the long term. Last month, Delbrook had losses of -6.5%, but its year-to-date performance is still at 100.6%. “Our objective for this fund was to aim to generate 20% to 30% returns with low double-digit standard deviation,” said Zabloski in a recent interview with Alternatives Watch. “It is not unheard of in commodity space on the long only side, but not heard of in the long/short business.” In July alone, the Delbrook Resource Opportunities Master Fund LP reported gains of 21.6% that brought its annualized return since its 2018 inception to 78.8%. Performance was buoyed from the tactical decision to overweight precious metal equities, specifically mid-cap production and development names, while increasing portfolio hedging via sector-focused ETFs, according to the firm. And while some commodities players active in mining nickel and other precious minerals involved in producing have profited too as of late, Zabloski is clear that buying the commodities directly is not where his firm needs to be as some in the private equity space have gone as far as purchasing mines or companies related to mining. For all intents and purposes, Zabloski said he has been able to build a better mousetrap relative to private equity and long-only funds. The macroeconomic themes are working in Delbrook’s favor. Global economies are still far off from a full economic recovery from the COVID-19 crisis, but as the world has been going on 12-plus years of underinvestment in reserve expansion in mining there is a bigger story unfolding for investors like Zabloski. That reality has pushed commodity prices up. Electric vehicles take three- to five-times more copper than conventional vehicles, Zabloski pointed out. And since copper and nickel mines are becoming depleted and they are key components of electric vehicles that only does more to drive up prices. Delbrook is estimating a near-term shortage of specific battery components, specifically those meeting ESG standards. The electrification of vehicles requires lithium, nickel, copper, and cobalt for battery production. ESG compliant sources are valuable, and Zabloski has been positioning the fund, accordingly. Also, investing directly in a company like Nikola or Tesla is not the way forward as stock price fluctuations of those popular companies add to portfolio risk. So instead the Delbrook thesis is to support the suppliers to those companies. Overall, the Delbrook strategy maintains a low correlation to broader equity markets. “In the next year, I feel quite strongly that certain companies should benefit over others, but certain equities related to those companies should outperform as well,” Zabloski added. Delbrook’s metals and mining focus is distinctive as the firm has in-house expertise related to its metals and mining focus and geologists on staff. Its Vancouver offices too are nestled in the mining mecca of British Columbia. This intimate knowledge of the mining industry has translated into substantial alpha this year. In Delbrook’s view the world is now coming out of a decade-plus trough for commodities. Some key commodities have some real green shoots at this point and going forward, Zabloski said. “We are not gold bugs, but if there was a time for precious metals to work it would be now. This V-shaped recovery is long in the tooth and people aren’t pricing in risk,” he added. Outside of precious metals such as gold, one example of a niche mining play in the portfolio is Brazilian mining operator Vale SA, which is well known for 2019 Brumadinho dam disaster at the Corrego do Feijao iron ore mine, which resulted in not only loss of hundreds of lives but also poisoned local rivers. While the company was punished by government authorities that prevented them from paying out dividends to investors, the expectation of Delbrook is that the company will earn enough free cash flow in the next four years to generate their entire current market capitalization -- essentially doubling in value. Largely ignored by the market, the position is a sizable long for Delbrook, which has several hundred million in assets under management. The clientele for the firm includes funds of hedge funds and sovereign wealth funds. The majority of capital is from single family offices and now some larger checks are coming in from larger institutional investors such as pensions as the triple digit return story is shared. Still the firm is putting on broad market and portfolio hedges in anticipation of a volatile fourth quarter. Going into 2021, the firm plans to continue investments related to precious metals, copper, nickel on the long side and will short uranium and the lithium market. Longer term, the continued low-interest rate environment that is pushing the U.S. Federal Reserve to let the economy to run hotter for longer is what Delbrook views as the biggest case for supporting hard assets.

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