Trade Like Second Curve Capital

Tom Brown, of Second Curve Capital, who previously worked with Julian Robertson's Tiger Fund, wears two hats.

By day he runs a hedge fund with more than $500 million in assets, but on the side he has set up the excellent blog, bankstocks.com, which is a great resource for uncovering alternative gems in the banking space.

I consider banking a great business when the yield curve is steep, because everybody gives you their money to hold on to. You pay them a small amount for the favor and then get to lend it out at higher interest rates, keeping the spread for yourself. It's the best business in the world when business is going well (fewer defaults) and when long-term interest rates are high (bigger spreads).

However, there are two problems that can occur with traditional banking. A look at the portfolio of Second Curve Capital, via its 13F-HR filing with the Securities and Exchange Commission, is an excellent education in how to circumvent those two problems.

The first problem stems from an inefficiency in traditional banking. Exploiting that inefficiency has created entire industries.

Basically, banks don't like complications. They don't want to give you an 18-month mortgage at 18% interest rates. Nor do they want to trust that students with no assets and no credit history are worthy of college loans. And if someone hasn't paid their credit card for 15 months, a bank is apt to throw in the towel and sell off that debt for 3 cents on the dollar.

The second problem, of course, is how to reach for higher yield when the yield curve is flat. At the intersection of these two banking world inefficiencies are some very good companies, several of which are in the portfolio of Second Curve Capital.

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At the time of publication, Altucher and/or his fund was long MRH, although positions may change at any time.

James Altucher is a managing partner at Formula Capital, an alternative asset management firm that runs several quantitative-based hedge funds as well as a fund of hedge funds. He is also the author of Trade Like a Hedge Fund and Trade Like Warren Buffett. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Altucher appreciates your feedback; click here to send him an email.

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