Sphera Strategy Management, one of the largest hedge fund managers in Israel, has written to its investors saying that the recent period has been "difficult" and that "in the past month the legislation on the legal system has turned from an event with a low likelihood of affecting the local market to an event with a high likelihood of having material consequences for the local economy and for lives."
The firm was founded in 2004 by three partners: Israel Mor, Doron Breen and Ron Senator. The firm’s CEO is Amir Levi. Sphera manages over $1.5 billion in seven hedge funds. Its investors are mostly financial institutions and qualified investors with liquid capital of over NIS 8 million. Instead of the regular quarterly letter informing investors about the funds’ returns, Sphera wrote to its investors at the beginning of March describing recent developments in the Israeli economy.
In the letter, the firm’s fund managers describe February as characterized by a "growing tidal wave" of "sales of shekel-denominated risk assets of all kinds", leading to a fall in prices of local stocks and bonds.
The tidal wave, the firm’s managers say, led to a particularly marked decline in long-term government bonds. They fell 10.5% in February "one of the sharpest monthly declines in the past decade," the letter states.
"This decline", the letter goes on to say, "led to aggressive repricing of local shekel assets, from local real estate developments, regardless of the companies’ business models, to income-producing real estate and companies in other sectors unconnected to activity in the local market."
Sphera’s letter says that part of its investment opportunities arise from what could turn out to be "an extreme overreaction to events, and "another part, no less important, comprises stocks of companies whose business activity does not coincide with the local market and is of course unaffected by the legislative moves taking place in Israel."
Therefore, despite the sharp falls, the firm believes that companies hit without regard to the impact on them of political events in Israel "could, in the medium term, correct the pricing distortion that has been created," or, in other words, shoot back up again.
"February presented us with several dilemmas when we looked to the future," Sphera told its investors. "How many of us would now sell the home we own after a 20-25% fall in price?" The letter displays a graph of the share price of Mivne Real Estate, one of Sphera’s longstanding holdings. In January-February 2023 it fell 16%, while the Tel Aviv 125 Index fell by only 4%.
"We know that, although it’s sometimes hard to grasp the new reality forced on all of us, it’s important to remember in the current event that the nature of economic storms is that they tend to die down and stabilize."
Sphera has therefore decided to diversify its portfolio and expand its exposure to more companies that are exporters and operate internationally, while "exploiting investment opportunities in high-quality, healthy local companies that have been hard hit in the past month and will correct when the storm dies down."
The letter points out that the Sphera Master Fund has given a 526.2% return since it was founded 20 years ago, while the Tel Aviv 125 Index has risen by a gross 224.1% in the same period.
Sources inform "Globes" that Sphera’s various funds outperformed their benchmark indices in January-February. The Sphera Global Healthcare Fund rose 0.15%, while the NYSE Arca Pharmaceutical Index (DRG) fell 7%; the Sphera Biotech Fund rose 10.9% versus a 0.7% decline in the SPDR S&P Biotech ETF (XBI); the Sphera Tech Fund rose 3.9%, while the BlueStar Israel Global Technology Index (BGTH) rose 0.4%; and the Sphera Small-Cap Fund, which invests in small-cap stocks in Tel Aviv, fell 2.5%, while the Tel Aviv Stock Exchange SME 60 Index fell 11.8%.
In response to enquiries from "Globes", Sphera Strategy Management stated: "The firm has the benefit of one of the longest-serving and most experienced teams in the industry, and we have no doubt that its excellent performance will continue. Sphera is the home of Israel’s leading funds, as evidenced by the fact that four of our five main funds have outperformed their benchmark indices so far this year. We are sure that we shall continue to provide our investors, who place their confidence in us, good results in the future as well."
Published by Globes, Israel business news - en.globes.co.il - on March 9, 2023.
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