Praetorian Capital Fund LLC experienced a 4.39% decline in net returns during the second quarter of 2026. This period highlighted the intricate and often unpredictable nature of global markets, with asset manager Harris Kupperman reflecting on unexpected market responses to geopolitical tensions and the persistent influence of what he terms "Feudalism" in the global economic landscape. The fund's Event-Driven strategies faced challenges due to market discontinuities, particularly influenced by political rhetoric, prompting a strategic reassessment. Kupperman also delved into the paradoxical nature of AI investments, acknowledging past misjudgments in direct participation while outlining a revised approach to identify secondary beneficiaries. The letter details key portfolio allocations across Emerging Markets, Precious Metals, Technical Colleges, Refiners, and St. Joe, emphasizing a cautious stance in anticipation of potential market corrections stemming from an AI-driven "unwind."
During the second quarter of 2026, the Praetorian Capital Fund LLC recorded a net depreciation of 4.39%. This outcome prompted reflections on market complexities, as manager Harris Kupperman noted the unexpected behaviors of gold, US Treasuries, and oil prices amidst Middle Eastern conflict. Contrary to conventional wisdom, these assets did not react as anticipated, underscoring the market's often counterintuitive short-term movements. Kupperman reiterated his long-held view that markets are inherently complex and can reach any price level in the short term, leading to a sense of humility despite the fund's moderate decline compared to its historical volatility.
Kupperman further elaborated on his concept of "Feudalism," where foreign oligarchs exploit cheap labor to produce goods for consumption in developed nations. The resulting dollar surpluses are then reinvested into US dollar-denominated risk assets, inflating their value and hindering global competitiveness for American businesses, except in a few sectors like technology. This cycle, he argued, disproportionately benefits a small elite in both nations while disadvantaging the majority. A brief disruption of this "Feudalism" occurred when geopolitical events in the Strait of Hormuz led to a temporary inability for Asian mercantilists to secure affordable energy. This forced them to ration industrial supplies, pushing prices to free-market levels and temporarily boosting the competitiveness and hiring rates in several US industries. However, this reversal of trends, which was unfavorable to the fund's long-Feudalism positions, proved to be short-lived as the conflict seemingly de-escalated.
The fund's Event-Driven (ED) book experienced significant underperformance, particularly since a change in political leadership, which introduced unpredictable market volatility. Kupperman observed that the "staccato nature" of political communications created disjointed market actions, making it difficult for the fund's usual tight risk profiles to operate effectively. After surrendering most of its first-quarter gains, the ED book was temporarily halted, reflecting Kupperman's risk discipline. He plans to re-engage with the ED book in the fall, shifting focus towards single-stock opportunities that have performed well, while avoiding broader macro situations frequently disrupted by political rhetoric, a strategy similar to what proved successful during previous administrations.
Regarding Artificial Intelligence (AI), Kupperman admitted missing out on the initial investment surge, having viewed the sector with historical skepticism. He drew parallels to massive capital expenditure programs of the past—canals, railroads, and fiber optic networks—which often led to bankruptcy and losses for investors, despite creating significant value for adjacent industries and consumers. While acknowledging that direct suppliers to the AI boom achieved phenomenal returns, he expressed concern about the sustainability of current AI spending. Kupperman believes that the buildout of AI infrastructure, which he likens to "shale oil" in its capital intensity, is nearing a critical point where the rate of capital expenditure growth will slow. He anticipates a painful surprise for funds chasing AI bottlenecks when new supply inevitably floods the market as growth decelerates, leading to a cyclical downturn that could crush shareholder hopes. His revised strategy focuses on identifying industries that will leverage AI to drastically reduce costs or grow revenue, aiming to be a "Rockefeller" rather than a "Carnegie" in the AI era.
In terms of portfolio positioning, the fund maintains a basket of Emerging Markets, anticipating that a weakening US Dollar, potentially driven by new policy directions, could act as a catalyst for asset value appreciation. Precious Metals also feature in the portfolio, with investments in companies that benefit from rising or sustained high metal prices, rather than direct mining operations. Technical Colleges, specifically Lincoln Educational Services and Universal Technical Institute, are seen as significant beneficiaries of the AI-driven need for workforce reskilling. Refiners are held as a hedge against accelerating global economic growth or a weakening US Dollar, which could drive increased demand for petroleum products. Finally, St. Joe Company, with its extensive land holdings in the Florida Panhandle, is viewed as a rapidly growing value investment, poised to benefit from population migration and increasing asset values during periods of inflation and urban instability.
This quarter's results, while a setback, did not negate the strong first-quarter earnings posted by most of the fund's holdings. The investment manager remains optimistic that previous upward trends can resume, especially as geopolitical uncertainties either stabilize or clarify. The manager's personal capital is heavily concentrated in the fund, underscoring a strong incentive to achieve positive returns but also signaling a cautious, risk-averse approach. He anticipates a steep decline in equity markets and a significant recession should the AI capital expenditure slowdown materialize, leading to opportunities to deploy capital at more attractive valuations. The fund is therefore positioned to maintain lower-than-normal exposures, awaiting what he describes as a market "smash" to acquire assets at bargain prices.
