| Valiant Capital founder Chris Hansen |
Christopher Hansen is not having a good year. In May the founder of the San Francisco–based hedge fund firm Valiant Capital Management lost out on a bid to buy the Sacramento Kings basketball team with a group of other investors.
To add insult to injury, his Valiant Capital Partners global equity hedge fund and its offshore counterpart have been bleeding money during a hot stock market. Hansen’s fund has lost more than 22 percent in the past ten months, while its liquid portfolio has dropped 25 percent and has lost money in nine of the past ten months. That period coincides with the time negotiations for the basketball purchase started to heat up.
In the first half of this year, Valiant’s liquid portfolio lost nearly 17 percent, while the side pockets portfolio lost less than 4 percent. Assets under management are now down 25 percent since year-end, to $2.1 billion.
How can a stock picker fare so poorly during a period when stocks are rising rapidly? Hansen’s most recent quarterly letter to investors helps answer that question by laying out in detail what went wrong — and what the fund got right.
To his credit, Hansen does not make excuses, blame others or avoid the issue. “I hope that the analysis provided does not come across as defensive or appear to be making excuses — we are merely trying to be as transparent as possible,” Hansen wrote in the 17-page letter outlining the fund’s second-quarter performance.
Drilling down, Hansen attributed the bulk of the funds’ losses to remaining significantly net long emerging markets. “We carry significant net exposure to India and Brazil — both of which have meaningfully underperformed the US markets year-to-date,” he stated in the report. In the first half of the year, the India stock market fell more than 7 percent, while the Brazil market plunged more than 28 percent. Hansen conceded that he should have done a better job trimming his emerging-markets longs.
Emerging markets are not the entire story, however. Hansen acknowledged that even his U.S. longs lagged the overall market. Among the biggest drags on performance were Apple and Facebook. On the other hand, longs such as Visa and Charles Schwab Corp. fared well.
Hansen also explained that the types of stocks his firm likes to short have been “flying,” especially in the U.S. He seeks out frauds and businesses he thinks will be zeros — which he defines as stocks that have been delisted, have halted trading for an extended period or have declined by more than 80 percent.
“While our strategy of shorting frauds and potential zeros is what helped our outperformance on the short side over our first four years, it also clearly contributed to the poor performance of our shorts over the last nine months,” Hansen wrote in the report.
Altogether, Hansen says his short positions gained 9.5 percent and cut into the performance of the liquid portfolio by 6.3 percent through the first six months of this year. Worse, his U.S. short positions gained 38 percent year-to-date and have reduced the liquid funds’ performance by 7.8 percent year-to-date.
Hansen is not changing his strategy, however. In fact, he is doubling down on his convictions. “We plan to continue to short strictly for absolute returns, not just as a hedging mechanism, and as such we will always short the businesses we feel have the dimmest prospects and are the most likely to be zeros — even if they cause us near term pain,” he told clients. He added that in light of the market’s overall rise, “we have continued to shift our short book even more heavily toward frauds and businesses we have a high conviction will ultimately be zeros.”
But Hansen lamented not shorting enough emerging-markets stocks. “I list this as a modest mistake, because the investible universe of shorts in most emerging markets is relatively small and in many markets non-existent,” he explained.
At the end of the first half, emerging markets continued to account for 60 percent of the firm’s long exposure and a vast majority of its net exposure. On a macro level, Hansen is skeptical of the impact of the unprecedented levels of quantitative easing and stimulus. He also is worried about the inevitable reversal of this policy. He pointed to the volatility experienced in the market when word got out that the Federal Reserve Board was mulling the winding down of its easing policy back in the spring.
“If this is the reaction to the mere mention of ‘tapering,’ we can’t help but be concerned about the market’s reaction to a full-fledged withdrawal of quantitative easing and the inevitable raising of interest rates,” Hansen states. “While this may not be ‘imminent,’ it also does not appear that far away.”
Judging by Valiant’s portfolio, it looks like Hansen may finally see a reversal of his recent bad run this quarter. For example, Apple, which remained his largest long position at the end of June, is already up 27 percent so far this quarter, while Facebook, his fifth-largest long, is up 50 percent this quarter. Liberty Global, the fourth-largest long, is up 4 percent.
On the other hand, India-based Mahindra & Mahindra Financial Services, his second-largest long, is down a little less than 1 percent, while Google, his third-largest position, is down just a little more than 1 percent. And the Indian stock market is down less than 1 percent.
Of course, we still don’t know the stocks Valiant owns in India except for Mahindra, let alone which stocks Hansen is shorting. We’ll get a clue when he reports results over the next few months and quarters.
Hansen’s firm is one among several dozen whose roots can be traced to Julian Robertson Jr.’s Tiger Management. Hansen is actually a Tiger Grandcub because he spent seven years working for a Tiger Cub, John Griffin of Blue Ridge Capital. Hansen started Valiant in 2008.
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