HAZELTON CAPITAL PARTNERS

Simplicity is The Ultimate Sophistication

To:
From:
Date:
Re:

Hazelton Capital Partners, LLC

Barry Pasikov, Managing Member
February 8, 2015
4th Quarter 2014 Letter to Investors

Dear Partner,
Hazelton Capital Partners, LLC (the Fund) gained 0.6% from October 1, 2014 through
December 31, 2014, declined 2.2% year-to-date, and has returned 85.3% since its inception
in August 2009. By comparison, the S&P 500 gained 4.9% in the same quarter, increased
13.7% year-to-date and has returned 125.8% since the Funds inception.

The Funds Performance The Year in Review

Hazelton Capital Partners ended the 4th quarter with a portfolio of 16 equity positions and
a cash level equivalent to 25% of assets under management. The Funds top five portfolio
holdings, which are equal to 36% of the Funds net assets, are: Western Digital (WDC),
Xerox Corp (XRX), Apple Inc (AAPL), DreamWorks Animation (DWA), and Cisco Systems
Inc (CSCO). Part of Hazelton Capital Partners investing process is to be as tax efficient as
possible. Even during a down year for the portfolio, the Fund continued to take profit on a
few of its long-term holdings, including Iconix (ICON), Wellpoint (WLP), Aerovironment
(AVAV), and CME Group (CME) which generated strong capital gains. During the 4th
quarter, Hazelton Capital Partners eliminated 3 positions while pruning a handful of
holdings. A portion of these quarterly sales were executed at a loss primarily to reduce (but
not eliminate) the Funds tax liability for 2014, with the anticipation that some of these
positions may be reestablished at a later date and at a reduced cost basis.
The general market did well in 2014, represented by the solid returns of the S&P 500 and
Dow Jones Industrial Average. But below the surface, a divergence in performance was
taking place based on market capitalization and economic sectors. Hazelton Capital
Partners portfolio was negatively impacted by a downturn in a number of unpopular
sectors including the oil and retail, as well as an underperformance in many of our small
capitalization companies. Most of these declines were driven by short-term market
sentiment and not the fundamentals of the company. In 2012, Jeff Kleintop, who at the
time was working at LPL financial, released a report showing the average holding period
for stocks over the past 50 years had declined from 8 years in the 1960s, to just about 1 year
in the 2000s. Representing nearly 70% of all US Equity trading volumes, the frenetic
activity of High Frequency Trading (HFT) combined with Exchange Traded Funds (ETF)
have continued to drive the average holding period and by 2012 it was down to just over 5
days. High Frequency Trading is an automated, algorithmic computer program that

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exploits infinitesimal small changes in stock prices by buying and selling thousands of
shares in a fraction of a second. Its sole purpose is to lock in small profits thousands of
times during a trading day. Even when excluding the impact from HFT and ETFs, the
trend is very clear: Financial decisions have become primarily focused on reacting to shortterm events. Hazelton Capital Partners does not operate in this manner for many reasons,
but mainly because we do not possess a competitive edge in short-term directional trading.
The Funds competitive edge lies in creating a concentrated portfolio of equities on which
we have done extensive research, and whose future intrinsic value is significantly higher
than where the stock price is trading today. This investing strategy may be easy to
understand but is challenging to execute, mostly because one needs to remain patient and
override the primordial urge to take action.
In early 2011, Hazelton Capital Partners began building a position in Western Digital
(WDC), an unloved and undervalued company which was overlooked by the general market.
Throughout 2011 and into 2012, Western Digital stock performance was muddled in
obscurity while the overall market maintained its unabated growth trajectory. However,
the fundamentals of the company were not only improving, but the entire industry was
consolidating, leaving Western Digital with a 45% market share and one of three remaining
players in the hard disk drive market. Investing independently of market consensus can be
a lonely venture. Looking back over that period of time, there were many days when I
questioned my investing thesis, let alone my sanity. However, with the luxury of a longterm investing horizon, Hazelton Capital Partners was able to remain focused on the
companys fundamentals and not market consensus. Had the Fund given in to the
conformity of groupthink, it would have missed out on what has been a very significant
contributor to the overall growth and strength of the Fund.

Entropic Communications (ENTR) Closed Position

32% Loss
Entropic Communications (ENTR) operates in a niche segment of the $250 billion
semiconductor industry, providing solutions that allow video content to be securely
delivered, processed, and distributed into and throughout the home. As the developer and
founding member of MoCA (Multimedia over Coax Alliance), Entropic has been responsible
for creating the platform on which in-home video networking is based. Except for AT&T,
which uses HomePNA (Home Phoneline Networking Alliance), every North American cable,
satellite, and telecommunications service provider uses the MoCA standard. The benefit of
using coax to distribute content in the home is that it can support the high bandwidth
needed for High Definition (HD) video and other broadband services to run simultaneously.
Verizon was one of the first to adopt the MoCA standard, as it needed a way to connect its
video service from its newly deployed FiOS (fiber optic) network into the home. But as
more cable and satellite companies began offering services like DVR and Video On Demand
(VOD) across multiple set-top boxes, the need for a secure, reliable communication into and
throughout the home became evident.
Even though Entropic was the pioneer of MoCA, the company began to see its 50% market
share erode as competitors began embedding the MoCA standard within a system on a chip
(SoC) integrated circuit. Unlike its main competitors, Entropic lacked the design capability
of creating a SoC. In April of 2012, Entropic addressed its short-comings by acquiring a
segment of Trident Microsystems responsible for SoC chipset design. But, because of their
delayed response, the company missed a full design and roll-out cycle, including Comcasts

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X1 set-top box platform. Throughout 2013, Entropic announced new design wins of its
integrated Soc with major cable companies including Comcasts newest set-top box, the Xi3,
which was schedule to begin its rolled out by the 2nd half of 2014.
Hazelton Capital Partners viewed Entropic Communications as a mutual opportunity to
invest in the growing niche market of in-home entertainment with an industry pioneer that
had strong ties to Cable and Satellite companies. The Fund also believed that management
had made the necessary design and structural changes within the company to rebuild both
its market share and leadership position within the domestic cable industry. However, the
real opportunity for revenue and margin expansion would come from overseas, especially in
Latin America, where pay-TV penetration had increased from 36% to 52% since 2008.
Since the countries of Latin America never spent the money to lay cable, almost all of the
growth in pay-TV had come from satellite providers. Direct TV, which was both a key
customer of ENTR and the number one provider of satellite TV in Latin America, witnessed
a subscriber CAGR of 24% over the past five years and 30% in 2013. The Trident
Microsystems acquisition was still negatively impacting R&D and SG&A costs, but some of
the SG&A costs were already being addressed by head count reduction. The remainder of
the costs would be offset by higher revenues from future design wins and production
contracts with Cable and Satellite companies over the next 12 months. But it was
Entropics robust balance sheet with no debt and nearly 40% of its market capitalization in
cash that was the deciding factor. In 2014, Hazelton Capital Partners bought shares of
ENTR at a cost basis of $4/share.
Unfortunately, delays from Comcast and other cable operators continued to generate
negative net income for the company and siphoning off their cash position. Entropics
limited response was to continue to cut overhead. After a number or staff reductions, the
board decided that Entropics CEO was ultimately responsible for the poor execution and he
was fired as well. Hazelton Capital Partners had been in the process of reducing its
position in the stock, but sold its remaining shares after the departure of the CEO. Even
though this opened up the door for Entropic to be acquired, our investing thesis and reason
for owning the company was broken, and simply hoping that the stock price trades higher is
not part of our investing strategy.

CME Group (CME) Closed Position

93% Gain
Hazelton Capital Partners was originally attracted to CME Group due to the niche market
it served and the fact that its business model was extremely scalable. CME Group owns
and operates a number of futures and derivative exchanges including the Chicago and New
York Mercantile Exchange, as well as the Chicago Board of Trade. Over the years, CME
Group has diversified into a number of financial and commodity products encompassing
interest rates, equity indexes, currencies, metals, grains, livestock, and energy, generating
high margin revenue by providing transaction and clearing services. The futures exchange
segment of the financial industry is highly concentrated (the top 8 exchanges executing 80%
of all volume) with the CME Group commanding the top spot and over 15% of the market.
Success in the futures and derivates industry comes from a two-tier approach: 1)
Developing and listing contracts that will help clients hedge an underline risk; 2)
Expanding the number of transactions in those contracts which leads to increased revenues
and profitability. Once critical mass has been achieved (the amount of contracts needed to
be executed to cover the fixed costs), there is little to no extra costs for transacting and

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clearing additional trades. In fact, technological improvements over the years have reduced
the transaction and clearing fees, another way to attract more clients and expand the
protective moat surrounding the business. It is important to understand that exchanges
do not have exclusivity to a particular futures contract; the contract or a similar contract
can be multi-listed on a competing exchange. So, metrics like open interest (the number of
future contracts that remain outstanding on a particular futures exchange), trading
volumes, and liquidity are important factors in creating a network effect and discouraging
other exchanges from listing established or similar products. Hazelton Capital Partners
began acquiring shares of CME Group in November of 2011. At the time of our purchase,
CME Groups share price had been under steady downward pressure, partially because of a
fundamental slowdown in interest rate futures volumes, but more directly because of the
uncertain liability generated by the bankruptcy of MF Global.
Interest rate futures and options account for 25% of the CME Groups revenue. These
financial contracts are used primarily by Institutional Investors to hedge against or take
advantage of short-term changes in interest rates. Since December of 2008, the Federal
Reserve engaged in a Zero Interest Rate Policy (ZIRP) followed up by a monthly
Quantitative Easy (QE) program to underpin and breathe new life into the US economy.
These programs essentially signaled to the market that the Federal Funds Rate would
remain below 25 basis points (0.25%) over an extended period of time. With no ambiguity
surrounding short-term interest rates, interest rate futures volumes declined and continued
to remain anemic. This financial headwind continued to drive CME Groups share price
lower. However, it was not until mid November of 2011 that Hazelton Capital Partners
saw an opportunity to make an investment.
In late October 2011, MF Global, a futures and derivates broker, illegally transferred
nearly $900 million dollars from its clients segregated funds to mask a trading loss from
the firms proprietary trading account. This led MF Global to be out of compliance with the
CFTC, unable to make up the shortfall and ultimately forced to declare bankruptcy. In
addition to transacting and clearing futures trades, CME Group acts as the Designated
Self-Regulatory Organization (DSRO) overseeing 50 futures brokers, including MF Global.
After the announcement of MF Globals bankruptcy, questions began to rise as to the
quality of CME Groups oversight and whether the company would be financially liable for
MF Globals transgressions. In addition, the bankruptcy froze all of MF Global customers
accounts, and since MF Global housed the greatest number of Institutional clients and
Trading accounts, this was seen as also having a negative impact on CME Group.
In November 2011, Hazelton Capital Partners began adding CME Group to the portfolio,
believing that the declining trading volumes and the possible financial liability form MF
Globals bankruptcy were more than reflected in the companys diminished stock price. In
fact, at $47/share, the market was pricing in continued contraction in revenue and margins
well into the future. The Fund believed that as the economy continued to mend, the
Federal Reserve would be forced to address its ongoing QE and ZIRP programs, which in
turn, would eventually lead to higher trading volumes. Today, even six plus years after the
financial crisis, it remains uncertain when interest rate future and derivative volumes will
return to their pre-crisis levels, if at all. Over the past 3 years, CME Management had
done a good job of streamlining operating costs, which had been reflected in its share price.
By early December 2014, CME Groups share price reflected its intrinsic value, and the

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Fund could not justify holding the position as it continued to wait for interest rate volumes
to return to normal levels, and removed it from the portfolio.

Administrative
My Pledge
From my years of experience in business and investing, I have come to learn that trust is
earned, not bestowed. It takes years of hard work to earn someones trust, but only a few
seconds to destroy it. I do not take your trust in me lightly and pledge to continue to go
beyond what is required to meet your expectations. The goal of Hazelton Capital Partners
is to repay your trust with returns that will outperform the market.
Investing in Hazelton Capital Partners
Hazelton Capital Partners was created as an investment vehicle, allowing those interested
in long-term exposure to the equity market to invest along-side me. With a substantial
portion of my own capital in the fund, I manage Hazelton Capital Partners assets in the
same manner in which I manage my own capital. The best source of introduction to
potential investors in the Fund has come from those that have invested or followed
Hazelton Capital Partners progress over the years. Introductions are both welcome and
appreciated.
If you are interested in making or increasing your contribution to Hazelton Capital
Partners or just learning more about The Fund, please feel free to contact me.

Please do not hesitate to call me at (312) 970-9202 or email me

bpasikov@hazeltoncapital.com with any of your questions or concerns.

Warm Regards,

Barry Pasikov
Managing Member

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