Tiger Cub Christopher Hansen seems to have stabilized his embattled hedge fund, Valiant Capital Partners Offshore, at least for now.
Hansen’s firm, Valiant Capital Management, is based in San Francisco. Its global long-short hedge fund has made money in two of the past three months — including 0.77 percent in October — as well as in the third quarter after losing money for three straight quarters. This passes for a minor victory, although the fund did lag the major benchmarks in the September period.
The fund, however, is still down about 13 percent for the year through October, compared with a gain of more than 24 percent for the S&P 500. It is also down nearly 20 percent in the most recent four quarters, while the S&P 500 is up more than 19 percent.
Investors, however, have apparently given Hansen a strong vote of confidence. Despite its recent woes, the firm, which had about $2.2 billion in both its offshore and onshore funds at the end of September, has received only about $60 million to $70 million in redemption requests, according to an investor. In the third-quarter letter Valiant does acknowledge experiencing “a small number of redemptions.”
A noticeably confident Hansen is also soliciting new money for the fund, pointing to “a limited amount of capacity” that is available due to the redemptions and performance erosion.
“This comes at a fairly opportune time, given our excitement about the recent volatility in EM [emerging markets] and the incredible rise in the stock prices and valuations of many of our highest conviction and most fraudulent shorts,” he elaborates.
That optimism is also reflected in the overall portfolio. In the 24-page letter to investors, Hansen notes that gross equity exposure increased from 157.5 percent in the second quarter to 169.7 percent in the third quarter, while net exposure increased from 29.8 percent to 34.8 percent. “While we aren’t planning any significant changes going forward, I would just highlight that our gross exposure is getting close to the upper end of our comfort zone again and we will not hesitate to cut it back if the market continues its upward ascent,” he adds.
Most of Hansen’s biggest losses have come from his liquid portfolio, which accounts for roughly 80 percent of total assets. It is down close to 15 percent this year through October, while the side pocket portfolio is off less than 2 percent.
Hansen has been hurt by several factors. He has lost a lot of money from his aggressive long portfolio in emerging markets, especially India all year, Brazil in the first half and Indonesia in the third quarter. He also has lost a sizable sum from his shorts in developed markets, while his U.S. longs have lagged the strong gains in the market.
Hansen makes it clear he has no plans to make a dramatic shift in his portfolio or conviction. At the end of the third quarter, the U.S. and India had the largest net exposures in the portfolio.
“As long-term investors, we continue to believe that the EM businesses we own are exceptional, with great long-term growth prospects, run by excellent managers, and are trading at valuations that make us more than willing to hold them through a cyclical downturn,” he writes. He also expresses confidence in his short research, asserting that the day of reckoning will inevitably come for the vast majority of his short positions.
The firm’s U.S. portfolio accounted for about 52 percent of its total assets at the end of September, up from about 38 percent at the end of the second quarter, according to regulatory filings. However, while the filings include put options, they do not include shorts. The net equity exposure of the liquid portfolio was a little less than 35 percent, as the number of shorts far exceeded longs by 71 to 42, according to the letter.
What’s more, 12 percent of the third-quarter U.S. equity portfolio was more of a macro hedge — puts on an exchange-traded fund that tracks the emerging markets.
In any case, Hansen tells clients he has taken advantage of the big declines in his emerging-markets portfolio to add to positions at very low prices. “As odd as it may sound to some of you, we would actually welcome a more severe EM downturn if it meant we could add to the great businesses we own at even deeper discounts,” he adds, although he does not address whether this would further test the patience of his investors.
Hansen also concedes that he needs to improve his shorting skills and strategy, especially when it comes to recognizing “subtle changes to the thesis.”
And he admits he needs to do a better job of analyzing emerging markets. “Even as we pride ourselves on being long-term, patient investors, we must at the same time avoid becoming complacent, stubborn, or so attached to our longs that we miss better opportunities when they arise,” he tells clients.
Hansen, who has been similarly self-critical in past letters, also owns up to being overly confident at times due to his firm’s past success. “While this can be a good thing if properly balanced, when the scales tilt too far in the other direction it can obviously lead to serious issues like overconfidence, intellectual arrogance, and close-mindedness,” he writes.
