Arlington Value Capital might not be a name known in East Hampton but that’s just fine by Allan Mecham and Ben Raybould who’ve very quietly and very methodically built a money management track record that none of the hedge fund world’s leading lights in Greenwich or Manhattan can touch.
In a word, the Salt Lake City, Ut.-based Arlington posts return that could only be described as “staggering.” Since inception, the fund is up 873.2% gross versus 109.9% for the S&P 500. Then again, even a casual comparison of the fund to a broader index or benchmark isn’t particularly meaningful, it would appear, as gravity might not apply since apart from 2015 it does nothing but report profits significantly above the index benchmark. In 2008, as markets seized and banks collapsed, Arlington did 15.2%; in 2009 as central banks and governments flooded the markets with liquidity, the fund posted 91.2%.
Mind you, these returns have come without shorting a share of stock, either as an investment or for hedging, and no, there’s no superstar bench of analysts in the wings — there are no analysts. Arlington is just two guys who spend most of their time studying filings and doing research.
Over the years, ValueWalk has followed Arlington Value Capital, a fund at the center of conversation in the hedge fund industry due to their stunning returns. In media reports, Arlington’s enigmatic founder, Allan Mecham, has been described as the “400 Percent Man” in reference to reported performance has eclipsed some of the all-time great fund managers, and called by some as the “Next Warren Buffett”.
Not everyone shares this enthusiasm
Gary Teran, CEO of First Western Advisors, a Utah-based broker-dealer, approached ValueWalk to conduct cursory due diligence. Teran filed a whistleblower complaint with the Securities and Exchange Commission regarding Arlington Value Capital. ValueWalk reviewed the evidence they provided and did its limited review, including an interview with Mecham’s Partner at Arlington Value Capital. What follows is the story behind that limited due diligence, raising questions on both sides and illustrating the limits of what can be ascertained through public source data.
Teran, himself had an entanglement with the Utah Division of Securities that ultimately resulted in the division head leaving. After dropping charges against Teran, the state also issued an apology. “Let’s just say it is not the division’s normal practice to issue apologies,” George Robison, the securities division’s director of licensing, who led the investigation that resulted in the charges, told the Salt Lake Tribune. “We’ll let it go at that.”
How can a long-only hedge fund deliver positive returns regardless of market environment?
Gary Teran is a suspicious man. Having been registered with FINRA and the SEC a for more than 30 years running a broker-dealer and investment advisory business, the Utah man looks at Arlington Value Capital and claims of superhuman performance regardless of the market environment with caution.
At the center of Teran’s suspicion is Arlington’s celebrated performance.
The Utah-based hedge fund, now with over $1.1 billion in assets under management and closed to new capital, has been nothing short of stellar. Since 2008, Arlington’s reported performance shows it has more than doubled the performance of the S&P 500 through long-only investing strategy executed in mostly highly liquid large, publicly traded stocks — often significantly outperforming the returns of his largest holdings. This hedge fund’s positive performance into the teeth of the 2008 global financial crisis is particularly noteworthy. While numerous noncorrelated hedge fund strategies delivered positive performance during the financial crisis – the Societe Generale CTA index was up 13% in 2008 – there is one significant obstacle that Arlington overcame that most noncorrelated funds did not have: Arlington was one of the only known long-only hedge funds to deliver positive performance in 2008. Warren Buffett’s Berkshire Hathaway, for instance, which Arlington fund manager Mecham acknowledges as for an idol, was down nearly 32% over the same challenging period. Not only was Arlington’s performance positive, but it nearly doubled the S&P 500, a historic milestone for a long-only fund.
But the superhero act didn’t end in 2008. From 2008 to 2016, an investment in Arlington nearly tripled while the stock market performance of Mecham’s acknowledged idol, Warren Buffett – and Arlington’s largest investment holding for much of the period, Berkshire Hathaway – only managed a 72% gain. For a hedge fund to significantly outperform its largest investment holding is a notable feat.
“Our enthusiasm for Berkshire Hathaway is underpinned by a culture that’s chock-full of unusual qualities that cause it to stand out from the herd,” Mecham gushed to investors in a 2012 letter. “The uniqueness of BRK’s ethos is only surpassed by its effectiveness in building shareholder value.”
To investors, such performance seems like the Holy Grail, the ultimate goal. To skeptics, it can seem too good to be true. Teran, who claims to have been approached by Arlington to sell the hedge fund to investors in 2005, looks at the performance claims and calls them “ridiculous.”
Allan Mecham: “The 400% man” as an all-American success story, an “ordinary man” conquering Wall Street
As Allan Mecham and his longtime partner Ben Raybould sit in a small office in a tranquil part of Main Street in Salt Lake City, Utah, far away from the noise of Wall Street, they find a sense of satisfaction from defying the odds and seemingly enjoy thumbing their nose at the Wall Street elite.
“Our office feels more like an abandoned library with a couple of bums loitering around,” a 2013 letter to investors opined. “We have yet to be swayed by the virtues of analyst teams and investment meetings. We’re old school. We mostly just sit around reading, thinking, and waiting. A quip by Stanley Druckenmiller describes our process best: ‘I like to be very patient and then when I see something, go a little bit crazy.’”
They have defied the odds by not only posting spectacular performance but also by playing and winning at a Wall Street game by disregarding the conventional rules of success.
Mecham is known to wear T-shirts to client meetings and looking for the simple solutions to beating the market that makes it sound so easy. “We… look for lay-ups, or absolute no-brainer types of investments,” Mecham told investors in 2008, simplifying what is considered a complex and rare task. “The major advantage one has investing in the stock market is the ability to patiently wait for the slam-dunk opportunity.”
Such simplifications tend to play well on Main Street but can raise suspicions, even if it is not warranted.
Mecham, the stock picking wizard labeled by MarketWatch columnist Brett Arends as “The 400% Man” for delivering such rare returns performance over a 12-year period, decidedly does not meet Wall Street’s elite fund manager checklist. While attending college, he worked at Wasatch Advisors, a well-known local mutual fund company, where he was known as