DENALI INVESTORS, LLC

1120 Avenue of the Americas, Fourth Floor

New York, NY 10036
(646) 484-9896
www.DenaliInvestors.com

January 20, 2014

To:
Re:

All Limited Partners

Fourth Quarter 2013, Letter to Partners

Dear Partners:
Please find below material information regarding Denali Investors funds.

PERFORMANCE
Denali Investors
+12.7%
+66.0%
+115.3%
+13.2%

2013 Q4 Performance
2013 Year-to-Date Performance
Total Return Since Inception*
Annualized Return Since Inception*
* Return from inception November 2007

S&P 500 (Total Return)

+10.5%
+32.4%
+36.8%
+5.2%

GENERAL COMMENTS
We generated strong performance this quarter with significantly less exposure due to our large cash
position and hedges. As certain investments hit their price targets, we scaled back and exited several
investments including the Murphy Oil (MUR) + Murphy USA (MUSA) spinoff, and the United
Online (UNTD) + FTD Companies (FTD) spinoff. Overall, 2013 was a good year for the fund. We
more than doubled the returns of market while maintaining a significant net cash position of 25% to
35%. We have continued to find new special situation opportunities.
Looking to 2014, the opportunity set remains robust. Lets consider spinoffs. In 2009, for example,
there were only a few interesting spinoffs the entire year. The same can be said of 2010. However, in
Q1 of 2014 alone, there is a pipeline of fourteen spinoffs. A few are very interesting. In addition, the
overall special situations pipeline for the remainder of 2014 looks attractive and is growing. Our
opportunity set is increasing due to many more specific and understandable catalysts with attractive
risk/return profiles, despite the markets having risen.

DENALI INVESTORS, LLC

1120 Avenue of the Americas, Fourth Floor

New York, NY 10036
(646) 484-9896
www.DenaliInvestors.com

SELECT PORTFOLIO POSITIONS

During the fourth quarter, we shared a presentation on the related Liberty entities that are controlled
by John Malone. All of the medias attention, it seems, is on the bid for Time Warner Cable (TWC)
by Charter (CHTR) and Liberty Media (LMCA). In order to facilitate a potential transaction, LMCA
is offering to convert the minority Sirius XM (SIRI) shares into non-voting Liberty C class shares for
a low premium but with tax and participation advantages. Presently, SIRI accounts for 70% of the
LMCA net asset value. The bear hug on TWC by LMCA/CHTR and possibly others has begun with
an initial $132.50 mixed consideration offer (cash and stock). All eyes are on the next developments.
Meanwhile, there is very little attention being paid to what appears to be the more interesting
opportunities in Liberty Interactive (LINTA), Liberty Ventures (LVNTA), and Liberty Global
(LBTYA). In the first half of 2014, LINTA will separate and reclassify Liberty Digital (LDCA) assets
and the remaining LINTA will become QVC Inc. (QVCA). Also, LVNTA will separate and
reclassify TripAdvisor Holdings (LTCA) which will hold significant economic and also majority
voting control of TripAdvisor (TRIP). In addition, LBTYA may separate its Latin American assets,
although there has not yet been a definitive announcement.
On the surface, the Liberty entities look like an alphabet soup of stock symbols that is hard to
decipher. There are many simultaneous actions occurring within the Malone complex that seem hard
to connect. However, the opportunities are actually quite simple and only seemingly complex, which
is something Malone has done repeatedly since the early TCI days. I believe we are quickly coming
to a juncture that will create and unlock a great deal of value for investors.
The new crop of positions from Q4 2013 is promising and each has multiple near-term catalysts that
will unlock value. Let me outline certain ones below:
Spinoff + Dividend*: The Company will complete a spinoff in Q2 2014 and our position pre-spin
is $10 per share. The spinoff is worth $8 per share. The parent business is worth $10 per share and is
being sold, which will result in a full special cash dividend.
Activism*: In a position mentioned last quarter, the activists succeeded in surfacing a higher value
for shareholders, with the announcement of a competitor offering $15 per share. Our cost basis is
$10 per share. However, we believe the company has value of $15 to $25 per share and expect a
higher bid is possible by a number of other companies.
* Prices are normalized to $10 per share.
There are many catalysts in the queue for Q1 and it should be an eventful quarter. Our cash
position is 25%.

DENALI INVESTORS, LLC

1120 Avenue of the Americas, Fourth Floor

New York, NY 10036
(646) 484-9896
www.DenaliInvestors.com

NEXT OPENING: APRIL 1, 2014

Openings for both the DIAF and DIOL are on a quarterly basis. Existing partners of either fund
can add assets in increments of $50,000 at each opening.
The minimum initial investment for DIAF is $250,000. To invest in the fund one must be an
accredited investor as defined by the SEC. Openings are on the 1st of each quarter.
The minimum initial investment for DIOL is $250,000. To invest in the tax-advantaged fund, one
must be a non-US accredited offshore investor or tax-exempt account such as IRAs. Openings are
on the 1st of each quarter.
Please note that all new assets received are subject to the two-year lockup period.
CONCLUDING
Since inception, one could not have asked for a better environment in which to invest. I hope the
coming years will be as exciting and productive as the previous ones. As always, above all else our
focus remains on investing for survival.
I have posted letters and documents to the site so that you may refer to them at your convenience.
Should you have any questions, please feel free to contact me.
Respectfully,

H. Kevin Byun
(646) 484-9896
kbyun@denaliinvestors.com

DENALI INVESTORS, LLC

1120 Avenue of the Americas, Fourth Floor

New York, NY 10036
(646) 484-9896
www.DenaliInvestors.com

ADDENDUM
OUR INVESTMENT FRAMEWORK
It becomes worthwhile to revisit the fundamentals of our investment framework and to reevaluate
the manner in which they hold us in good stead through turbulent times. Although our partners
already adhere to our investment mindset and believe in the validity of the tenets (which we consider
sensible and logical), we know that most managed capital does not align with our framework.
Our basic structure (the allocation groupings and the incentive structure) is based on the Buffett
partnerships from the 1950s. Today, most people associate Buffett with a buy-and-hold-forever
philosophy. However, most people do not know how he first created wealth for his investors and
himself. What the popular view discounts is that Buffett began his career managing a hedge fund
that was value-based and heavily involved in special situations. Basically falling into two categories,
his Generals were undervalued stocks (still studied by many today) and his Workouts were
special situations investments (unstudied by almost all).
Generals + Workouts: The Generals (Long/Short) tend to produce returns that are more greatly
affected by the overall market performance, as with rising or falling tides. The Workouts (Special
Situations) tend to provide market agnostic returns and tend to have more attractive risk-reward
profiles in downturns. Much of Buffetts consistency in outperformance even during years in which
the markets declined is attributable to his special situation investments. Critically, the combination of
the two is much more powerful than either one alone in producing absolute returns over an
extended time frame.
The validity of this portfolio structure strikes me as powerful, simple, and elegant. In my view, those
that focus only on one category at the exclusion of the other are at a fundamental disadvantage. The
inherent balance in the combined structure is why Buffett himself said he expected, although could
not guarantee, to outperform in bear markets and underperform in bull markets. By having a
balanced tool kit, a portfolio remains flexible in allocating to the most promising opportunity set
that presents itself.
Flexible & Opportunistic Mandate: We have a flexible mandate that allows us to look at any
opportunities that may be attractive. Certain funds that are designed to fit into a style box remain
captive to a certain sector, geography or asset class. The problem for such fund managers is that
capital can flood out as easily as it floods in (i.e. technology sector funds in 1999 versus 2000 or
energy specific funds in 2008 versus 2009). Also, they become captive to a slice of the market when
it is no longer attractive and are simultaneously prevented from areas that are attractive. Whether
bargains are available or not is immaterial. The order of the day is to sell. As a generalist, our flexible
mandate allows us to look at opportunities across the spectrum.
Concentration: We are highly selective. Our concentration of investments into our best five to ten
investment ideas is an advantage. Our opportunistic style of investing allows us to wait for
investments with highly favorable risk-reward profiles and requisite margins of safety. Allocating

DENALI INVESTORS, LLC

1120 Avenue of the Americas, Fourth Floor

New York, NY 10036
(646) 484-9896
www.DenaliInvestors.com

more capital to really good ideas, which do not come around too often, simply makes sense. This
builds a portfolio one idea at a time, such that performance over time correlates to the outcome of
those ideas rather than to the market. On the flip side, the typical mutual fund holds about 80
positions, which practically guarantees below average performance and explains why 80% of them
underperform the market simply due to frictional costs.
Net Cash = Fortress: Another advantage is the ability to maintain net cash in the absence of other
opportunities. Many funds must be fully invested according to the funds mandate. A fund manager
must then perhaps buy at a time that may not be prudent or sell at a time that is even less prudent.
Our ability to hold cash is a great tactical advantage, especially as the current market dislocation
unfolds. Cash is a valuable strategic asset and not a burden. When the market is desperately seeking
liquidity, we will be able to provide it and invest on our terms. The use of leverage can be extremely
dangerous. As has become apparent, investments that were mediocre at best were made to look
superior in cooperative markets through the use of easy borrowing.
Scalability: Our investment ideas are scalable and can be of any market capitalization in any
industry. We are not restricted to any particular slice of the market and we view scalability more as a
function of the opportunity set provided by the market rather than AUM.
Alignment of Interests: We eat our own cooking. I have the lions share of my net worth in the
fund and I will continue to keep my assets in the fund. The idea is if we do well, we all do well
together. I can assure you that my focus is on judiciously growing partners capital. The fund
manager, whose responsibility is to protect and shepherd capital, should not be exempt from the
downside risk. One should cast a very skeptical eye at managers who consistently pull their fees out
of the funds they manage.
A SPECIAL THANKS TO OUR INVESTORS
Denali Investors is fortunate to 1) be extremely selective in the manner we make investments, 2) be
able to focus on research and investing as opposed to marketing and promotion, and 3) have
partners with a long-term value perspective in combination with outstanding professional and
personal character. The firm is lucky, and rare, in this regard.
One of the most important differences is that our investor base understands that a stock at a 75%
discount to intrinsic value can change to a 70% or 80% discount, simply due to short-term noise.
The short-term 20% move from the entry point is understood as largely meaningless and that the
eventual realization of intrinsic value is our focus. Another important difference is that our investor
base understands that the misplaced emphasis on a funds Sharpe ratio, Value-at-risk, tracking error,
or volatility is a particularly useless measurement for prudent management of capital.
It is a true pleasure to go to work every day on your behalf.
I thank you for your trust and support.