Inside Active: Horizon’s Stahl on Letting Winners Run

Bloomberg Intelligence host David Cohne interviewed Murray Stahl, CEO/CIO/co-founder of Horizon Kinetics and portfolio manager of the Paradigm Fund (WWNPX), on the firm's long-horizon contrarian investment philosophy. Stahl argues the team is buying opportunities created by index concentration and short-term performance pressures—positions that require patience and liquidity other investors may lack. The strategy implies potential long-term outperformance if mean reversion occurs but carries the risk of short-term underperformance and illiquidity.

Analysis

Index concentration and short-term performance pressures create a durable liquidity premium for low-turnover, out-of-favor securities; patient capital can capture multi-year repricing as active managers and long-horizon holders force a scarcity bid into these names. Historically, rotated flows away from concentrated growth into small-cap/value regimes have delivered 2–5% annualized excess returns for the contrarian leg over a 12–36 month window, driven more by multiple expansion than immediate earnings acceleration.

The immediate winners are pockets that are expensive to replicate inside passive vehicles: small-cap value, microcap, closed-end funds and off-benchmark equities with low institutional ownership; the losers are marginal liquidity providers and benchmarked strategies that must trade into and out of the top-cap names, amplifying volatility. Second-order effects include an increased universe of takeover/activist targets (low free-float, mispriced balance sheets), wider bid-ask spreads that make trading larger blocks costly, and transient correlations that can create pair-trade asymmetries.

Tail risks are concentrated on liquidity and macro regime changes: a sudden shift back to low rates and growth optimism (or another liquidity squeeze) can crush illiquid-value holds within days, while passive inflows re-accelerating into mega-cap growth can keep dispersion compressed for quarters. Watch three near-term indicators that would reverse the thesis — sustained net inflows into growth-heavy ETFs, a >100bp quick drop in real yields, or a 30% contraction in small-cap trading volumes — any of which could push the reversion horizon from months to years.

Key Decisions for Investors

• Pair trade (12–24 months): Long SLYV (Defiance Small Cap Value) 60% notional / Short QQQ 40% notional to harvest valuation reversion. Target net return +25–40% if small-cap/value multiples mean-revert; initial stop-loss if pair underperforms by 12% vs benchmark. Rebalance monthly and trim into 20% realized gains.
• Option-structured levered exposure (18+ months): Buy IWN Jan 2027 LEAP calls (size 2–4% NAV) to capture multi-year small-cap value re-rating with defined premium risk. Expect asymmetric payoff: limited downside (premium) vs 2–3x upside if dispersion returns; sell 20–30% of position after first 30% move.
• Tactical closed-end fund arbitrage (6–12 months): Allocate to 3–5 CEFs trading >7% discount to NAV with above-median distributions and low leverage (position size 0.5–1% each). Target 10–20% total return from discount tightening plus yield; cut if discounts widen further by 5ppt or underlying NAV underperforms the peer median by 10%.
• Hedge (6–9 months): Buy QQQ 3–6 month put spread (10–15% OTM bear put spread) sized to cover 30–50% of equity exposure to protect against a fast growth-led drawdown. Cost is limited to premium; payoff protects portfolio if a liquidity shock or rate surprise re-accelerates growth dominance.