TwinRock Value Opportunity Fund

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TwinRock Value Opportunity Fund
Year-End Report
2016
TwinRock Capital had a cumulative return since inception of 20% for 2016. To continue the fund's expansion we are extending the 0.00% Profit Fee Waiver until 2018. 
2017 Outlook and Strategy
The capital markets remain dominated by political and headline risk.   The underlying environment remains constructive for risk in our view, notwithstanding substantially elevated valuations in both credit and equity.

The fund's core strategy is to obtain income and capital appreciation from fixed income and equity securities.   In fixed income, the fund focuses on corporate credit (high yield bonds, loans, emerging/non-domestic bonds), preferred shares, and real estate (trusts, home builders).   The fund's equity strategy utilizes equity derivatives (options) to enhance returns and hedge fixed income exposure.

The fund started 2017 underweight risk in anticipation of opportunities when the existing momentum breaks.   The post-election consensus provides opportunities either from a disintegration of the consensus or a continuation of the current trend against prevailing skepticism. (We define the current trend as a slow grind higher in equity valuations against a backdrop of rising bond yields).   

US government bond yields remain a principle driver of market direction (both credit and equity). The substantial move from the summer 2016 low in yields to the current levels has been orderly - in so far as no cataclysm has spiked volatility and risk aversion.   Equity valuations have increased against a decline in government bond prices.   This can only go so far, in our view.   Volatility - as measured by equity and credit derivatives- is significantly low.   High yield bond prices are not cheap against most measures.   Equity valuations (multiples of earnings) are also at cyclical highs.   Macro-economic data is suggestive of ongoing (if not robust) economic expansion, healthy household balance sheets and low unemployment.   The Fed remains accommodative.

In summary, we are looking for a near-term catalyst to break the existing Goldilocks environment at which time an overweight (substantially leveraged) risk exposure would be warranted. In the interim we are selectively adding exposure where volatility may be muted to bring the fund closer to full allocation.
2016 Performance Since Launch
The fund launched in February of 2016, and began investing on September, 30, 2016, the eve of a precipitous decline in bond prices, driven principally by the marked selloff in US treasuries  with the aim of progressively building exposure to fixed income and equity positions per the strategy outlined above.



 
As of December 31, 2016 the fund was substantially under-allocated with cash holdings comprising 61% of Net Asset Value.
 
The rationale for the maintenance of the high cash position through the 4th quarter was in keeping with the fund's overarching mandate to prioritize capital preservation over income and capital growth.
 
In the 4th quarter volatility and risk associated with what appeared to be a bottoming (at least for the short term) of US treasury rates in July presented limited attractive opportunities in credit or fixed income duration, particularly in light of the uncertainty associated with the looming US presidential election.  
 
In hindsight, the conservative position was warranted. US treasuries experienced their worst selloff since the May 2013 "taper tantrum", with the US 10y widening over 85 basis points (an 8-9% capital loss) in the period between September 30-December 31, 2016.  
 
The fund's performance for the 3 months ending December 31, 2016 was a net loss after expenses of 1.45%.   On a monthly basis the fund's performance was -.76% in October, -.89% in November and .19% in December.   The fund targets absolute returns and does not seek out performance against prevailing benchmarks.   Comparatively, however, in the corresponding 4th quarter period, the Barclays Aggregate Bond Index (AGG) returned -3.87% and the S&P 500 returned 3.25%
 
The fund's holdings at December 31, 2016 were cash (61%), high yield corporate bonds (33%), and net equity derivatives (2%).

Top 5 Holdings
Issuer
Security
Cash
USD
HCA Holdings
5.875% due 2023
Cooper Tire
7.625% due 2027
Liberty Media
8.50% due 2029
Pulte Home
6.375% due 2033
Fund Description
The TwinRock Value Opportunity Fund is a credit investment fund focused on the debt obligations of corporate borrowers. The fund invests in bonds and loans of corporate issuers in the high grade and non-investment grade rating categories. The fund seeks to deliver steady income and in appropriate market conditions capital appreciation by holding securities with substantial yields which are remote from default. The fund employs leverage to enhance return and may invest in equities and derivatives at the fund manager's discretion . The fund does not compete with a benchmark; the fund seeks absolute returns which exceed long-term equity averages, with the substantially lower risk and volatility that is associated with higher quality bonds..
Portfolio Performance

Net Asset Value (NAV)

TwinRock Affiliated Portfolio

Inception
1.00
February*
1.01
March*
1.08
April*
1.12
May*
1.13
June*
1.15
July*
1.20
August*
1.22
September*
1.22
October
1.21
November
1.20
December
1.20
*Shadow Fund of principal's account

Cumulative Performance


General Information
Performance Allocation
0.00% until January 1, 2018
Management Fee 1.50%
Redemption Period
June 30 and December 31 with 120 days written notice
Prime Broker Interactive Brokers
Auditor Squar Milner
Tax & Administration Squar Milner
Fund Administration Panoptic Fund Administration
Legal Alliance Legal Partners
Aizaz Shaikh
President
aizaz@trp-llc.com
Alexander Philips 
Chief Executive Officer
( 949) 640-0660 
alex@trp-llc.com
Michael L. Meyer
Chairman
mmeyer@trp-llc.com