You have to hand it to John Thaler — so far, the Tiger Grandcub’s three-year reboot has been a big success.
The telecom, media, and technology specialist was up 3.7 percent in 2022 after gaining 5.2 percent in the fourth quarter. This was no small feat, given that other well-known, tech-oriented Tiger-related funds lost more than a third and in some cases half their capital last year.
Altogether, JAT Capital is up more than 103 percent over its first three years. “These past three years have been an incredible test case for the most significant modification we have made to how we manage our money — risk management,” Thaler told clients in his fourth-quarter letter, obtained by Institutional Investor.
Thaler is a Tiger Grandcub because he previously worked at Shumway Capital, a firm headed by one-time Tiger Management analyst Chris Shumway.
Thaler shuttered JAT Capital in 2015 after eight years of mixed results. He launched his current fund in January 2020 as the Wexford Core Equities Fund, which had been a standalone entity while he was a portfolio manager at Wexford Capital.
That fund was then spun out of Wexford Capital on October 1, 2020 as Hampton Road Capital Management. Then, in May 2022, Thaler decided to change the name of the firm back to JAT Capital Management, explaining to his clients that this was the brand for which he was most known.
Today, JAT Capital manages about $700 million. Thaler’s current risk management approach is evident in the portfolio’s exposure levels. Over the past three years, the fund has averaged a nearly 150 percent gross exposure and 20 percent net exposure.
JAT has especially benefited from the short book. In 2022, longs cost the fund more than 41 percent of performance, but the shorts kicked in more than 47 percent to gross gains. The longs also made money in the fourth quarter, contributing 2.4 percent to performance, while the shorts added 3.9 percent.
Thaler called the December three-month period “a good quarter for risk management and tactical trading.” He stressed in the letter that performance in general had been “aided by meticulous adherence to factor exposures and overall risk levels while tactically trading high-conviction names that are getting whipped around by market participants without regard to fundamentals.”
He added that the tactical trading benefit was especially apparent in the fourth quarter, which began with a market rally amid hopes that inflation was peaking and Fed policy would therefore soften. However, the market was then pummeled in December after stronger than expected inflation data and hawkish language from Fed Chairman Powell.
Thaler acknowledged that when there is a shift in the macroeconomic and/or geopolitical backdrop, company-specific fundamentals can become less important to stock prices. “Failing to identify and adapt to these changes when they become the driver of stock prices and/or ignoring the need to insulate yourself from them can be catastrophic,” he elaborated. “These types of non-idiosyncratic factors were the primary driver of volatility in JAT 1.0 and have remained pitfalls for investors over large portions of the last three years.”
Thaler said that the changes that JAT made to risk management have enabled it to do “an exceptional job” of insulating the fund from the market’s unpredictable whipsawing and volatility. “The goal of risk management is to allow stock picking to be the primary driver of performance, and we believe, thus far, that [this] has been largely accomplished,” Thaler added.
He said that when he relaunched his fund, he hoped to control fund-level volatility during dislocations, minimize drawdowns, and avoid selling high-conviction names at the bottom, but at the same time be in a position to add to names that were dislocating and creating forced selling.
“What was formerly one of our biggest challenges could then become an opportunity,” he said.
Thaler stressed that since August the fund has been running “tighter than normal risk.” This means lower gross and net exposures, tighter factor exposure, and lower overall fund-level volatility.
The adjustment to exposures is based on Thaler’s belief that “the market will whip around” until there is a perceived resolution to three important things: the shape of the inflation curve and some sense of duration; the Feds response; and forward estimates for all things to be reset lower, under the assumption that “everything is likely going to miss current expectations.”
“Until we get these three things, I don’t believe either bulls or bears can confidently lean in either direction, because they are one bad datapoint away from the market gapping 10 percent against them,” Thaler explained. “This is definitionally a terrible market for stock pickers.”
This scenario is currently Thaler’s near-term outlook. But he stressed that the next 60 days will be critical as we get what he calls a “numbers reset,” with most companies guiding down their 2023 estimates. “The dynamic where numbers are reset meaningfully lower, inflation is clearly plummeting, and the Fed is signaling pause/ease is how the market can bottom and bulls can step in and buy for an extended rally,” he added.
He expects this process to occur over the first three to six months of this year. “Our plan is to own these companies on the other side of the bottom,” Thaler stated. “In several cases we are beginning to build positions in these now.”
