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Expensive Accomplice:
Arquitos returned 29.6% web of charges within the second quarter of 2025, bringing the year-to-date return to 66.8%. Particular person returns will range primarily based on timing of funding. Please test your assertion for particular outcomes. See web page 5 for extra detailed efficiency data.
I’ve at all times tried to take a position on an absolute foundation reasonably than a relative one. Over the long run, my objective is to generate sturdy, constructive efficiency no matter what the broader markets are doing. If markets decline, my goal isn’t merely to lose much less, it’s to earn money.
That stated, you will need to take into consideration alternative value in your allocations the identical means I take into consideration alternative value when choosing particular person investments. Whereas I’ve traditionally prevented benchmarking the Arquitos portfolio, conversations with a number of of you’ve got helped me higher recognize an investor’s need to check our outcomes to a related index.
The query, after all, is which market benchmark is sensible? Up to now, I’ve stated that if you need a easy comparability, you’ll be able to at all times look to the S&P 500 (SP500), (SPX). However given the kinds of holdings in our portfolio, that’s not an acceptable level of reference.
It’s price noting that we’ve been in an unusually lengthy stretch of remarkable efficiency by largecap corporations. Since our launch in April 2012, the S&P 500 has returned 14.4% yearly. That is effectively above its long-term historic common, and never one thing that’s prone to proceed for an additional 13½ years. Over that very same interval, small caps have lagged behind with the Russell 2000 Index returning 10.0% yearly.
We may additionally take into account the HFRI Hedge Fund Index, which naturally produces decrease returns however with a lot much less volatility. Or maybe a microcap or particular conditions index could be related. In the end, the comparability that issues most is the one which helps you body Arquitos inside your broader allocation.
Going ahead, I’ll use the Russell 2000 Small Cap Index as our main level of comparability. It’s not an ideal benchmark, however it greatest displays the universe the place I spend most of my analysis time and the place our investments are likely to reside. It additionally presents a wholesome problem, as small caps are prone to outperform giant caps over the approaching decade, reversing the pattern of the previous one. So, if it’s good to categorize the fund inside your portfolio, take into account Arquitos a part of your small-cap allocation.
As a reminder, Arquitos Capital is an unconventional hedge fund invested in a small variety of distinctive corporations. I focus my analysis on company-specific conditions, usually in smaller corporations. Not like most funding funds centered on particular conditions, we’re prepared to carry corporations for a few years, generally even many years, as their companies evolve and the market in the end acknowledges their worth.
Beneath is an replace on our main holdings:
Liquidia Company (LQDA)
Liquidia’s share worth rose to $22.74 on the finish of the third quarter, up from $11.76 initially of the 12 months. Our publicity is primarily via long-dated name choices, reflecting my conviction within the firm’s long-term potential.
In Could, Liquidia obtained FDA approval for its flagship product, Yutrepia, an inhaled formulation of generic treprostinil used to deal with Pulmonary Arterial Hypertension (PAH) and Pulmonary Hypertension related to Interstitial Lung Illness (PH-ILD). Yutrepia makes use of Liquidia’s patented PRINT® manufacturing know-how, which creates exact, uniform drug particles. Medical research and now realworld expertise present that PRINT improves therapy efficacy by delivering treprostinil extra successfully to the deep lung with much less affected person effort and fewer unintended effects.
Yutrepia’s business launch has been distinctive. FDA approval got here in late Could 2025, and Liquidia’s Q2 2025 company replace reported greater than 900 distinctive affected person prescriptions and greater than 550 affected person begins throughout the first 11 weeks. CEO Roger Jeffs, who has beforehand acknowledged that he believes Liquidia may seize 80% to 90% of the market, stated that “preliminary demand has exceeded even [his] personal excessive expectations.”
My very own channel checks, corroborated by different funding managers, counsel that Yutrepia’s launch has considerably outpaced sell-side analyst forecasts. At this stage, there may be little for us to do however await the official information to validate what we’re already seeing within the area.
Regardless of this progress, Liquidia shares stay mispriced. The disconnect stems from two components:
- Overly conservative affected person adoption estimates from sell-side analysts
- Uncertainty surrounding ongoing litigation with United Therapeutics (UTHR) over the ‘327 patent
The subsequent month must be significantly fascinating for Liquidia’s share worth as the corporate has a number of company updates scheduled, together with their Q3 report. I additionally count on a ruling within the ‘327 case shortly.
Relating to the ‘327 patent dispute, the end result will have an effect on solely Yutrepia’s PH-ILD indication, not its PAH gross sales. The most probably situation is a whole win for Liquidia. Different potential outcomes embrace a modification to Yutrepia’s label or a royalty association. Whereas a positive verdict is anticipated, and the choose already denied United Therapeutics’ makes an attempt to dam the PH-ILD launch on the preliminary injunction stage, authorized outcomes are inherently unpredictable.
Again in early 2024, I estimated a bull case of $100 per share and a base case of $75 per share by 2027. I proceed to face by these targets. As soon as the litigation is resolved and affected person information are publicly confirmed, the door opens additional for potential M&A exercise.
ENDI’s share worth rose to $17.50 on the finish of the third quarter, up from $11.43 initially of the 12 months.
The corporate is actually composed of two main elements: Its CrossingBridge asset administration subsidiary, and a portfolio of money and investments.
CrossingBridge continues to carry out exceptionally effectively. Belongings beneath administration grew to $4.2 billion on the finish of the third quarter, up from $3.4 billion in the beginning of the 12 months. Over the previous twelve months, EBITDA totaled $9.2 million, with $3 million generated in the latest quarter alone.
On the stability sheet, ENDI holds roughly $53 million in money and investments and $10 million in debt.
On the present share worth, ENDI’s market capitalization is about $95 million. Adjusting for web money and investments and making use of a ahead annualized EBITDA run charge, the implied EBITDA a number of is roughly 4x.
As you already know, ENDI stays a extremely concentrated place for us, although it now represents a smaller allocation than earlier within the 12 months. I’m comfy with this publicity for a number of causes:
- My direct involvement as a board member,
- The corporate’s clear undervaluation, and
- Its built-in diversification on the company stage.
On that final level, a look-through evaluation reveals that, on the finish of ENDI’s most up-to-date publicly reported quarter, it was as if Arquitos held roughly 38% of its portfolio in money and extremely liquid shortterm investments, a significant buffer that reduces general portfolio danger.
Finch Therapeutics (OTCPK:FNCH)
Finch’s share worth rose to $12.28 on the finish of the third quarter, up from $11.30 initially of the 12 months.
As a reminder, Finch received a jury trial in August 2024 in opposition to Ferring Prescription drugs, with the jury discovering that Ferring infringed three of Finch’s patents. The decision awarded Finch roughly $30 million in a one-time licensing payment and pre-trial curiosity, plus ongoing royalties to be decided by the choose and post-trial curiosity. Importantly, the jury additionally discovered willful infringement, opening the door for enhanced damages as much as 3 times the jury award.
After I first mentioned Finch in January, I had anticipated a post-trial determination by the tip of the primary quarter. That clearly hasn’t occurred but, however the potential final result makes the wait worthwhile. Even beneath the worst-case situation, with none enhanced damages, Finch shares are price a minimum of double their present worth.
I received’t speculate additional on timing. What I can say is that this can be a scenario price ready for, and we’re content material to take action.
As you’ll be able to see from the positions mentioned above, endurance is a essential ingredient in our technique. As an example, our funding in Liquidia detracted roughly 10% from portfolio efficiency final 12 months, but it has been a serious contributor this 12 months. That non permanent decline really labored to our benefit. It gave me the chance to materially improve our place at enticing costs, which in the end enhanced our long-term returns. The important thing was sustaining conviction, re-underwriting the thesis, and including when different traders hesitated.
I don’t give attention to year-to-year fluctuations in any single holding. What issues is the full return over your complete holding interval evaluated in opposition to the present alternative set. I encourage you to view your funding in Arquitos via the identical lens.
Whereas I’m happy with the fund’s efficiency to date this 12 months, I imagine every of our core holdings stays considerably undervalued. I’m significantly excited in regards to the monetary outcomes that these corporations will present in November.
Thanks, as at all times, in your endurance, belief, and dedication to Arquitos.
Greatest regards,
Steven Kiel
Arquitos Efficiency Since Inception
Arquitos (Gross) Arquitos (NET) Russell 2000
| 2025 YTD | 71.5% | 66.8% | 10.4% |
| 2024 | 30.9% | 29.6% | 11.5% |
| 2023 | 23.3% | 22.1% | 16.9% |
| 2022 | -52.5% | -52.9% | -20.5% |
| 2021 | 56.5% | 54.9% | 14.8% |
| 2020 | -1.3% | -2.3% | 19.9% |
| 2019 | -13.8% | -14.7% | 25.5% |
| 2018 | -30.6% | -31.3% | -11.0% |
| 2017 | 80.8% | 64.0% | 14.6% |
| 2016 | 65.4% | 54.9% | 21.3% |
| 2015 | -14.0% | -14.8% | -4.4% |
| 2014 | 72.8% | 57.8% | 4.9% |
| 2013 | 58.7% | 46.6% | 38.8% |
| 2012* | 9.0% | 7.2% | 6.9% |
| Annualized | 18.0% | 14.1% | 10.0% |
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*Based April 10, 2012 |
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Disclaimer This letter is for informational functions solely and doesn’t replicate all the positions purchased, bought, or held by Arquitos Capital Offshore Grasp, Ltd. or its feeder funds, Arquitos Capital Companions, LP, and Arquitos Capital Offshore, Ltd. Any efficiency information is historic in nature and isn’t a sign of future outcomes. All investments contain danger, together with the lack of principal. We disclaim any responsibility to offer updates or adjustments to the data contained on this letter. Efficiency returns introduced above are for Arquitos Capital Companions, LP and replicate the fund’s complete return, web of charges and bills, since its April 10, 2012, inception. They’re web of the excessive water mark and the 20% efficiency payment, utilized after a 4% hurdle, as detailed within the confidential personal providing memorandum. Arquitos Capital Offshore, Ltd. was launched on March 1, 2018. Returns from Arquitos Capital Offshore, Ltd. could differ barely and aren’t introduced right here. Efficiency returns for 2025 are estimated by our third-party administrator, pending the year-end audit. Precise returns could differ from the returns introduced. Positions mirrored on this letter don’t symbolize all of the positions held, bought, or bought. This letter by no means constitutes a proposal or solicitation to purchase an curiosity in Arquitos Capital Companions, LP, Arquitos Capital Offshore, Ltd., or any of Arquitos Capital Administration’s different funds or associates. Such a proposal could solely be made pursuant to the supply of an authorised confidential personal providing memorandum to an investor. |
Editor’s Notice: The abstract bullets for this text had been chosen by In search of Alpha editors.
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