| Lee Ainslie, Maverick Capital (Bloomberg) |
Most of the hedge fund managers who have roots going back to legendary investor and Tiger Management Corp. founder Julian Robertson Jr. may have underperformed the surging stock market in 2013. However, a look at the long-only funds managed by these so-called Tiger Cubs — as well as a breakdown of the long-short portfolios of other funds — clearly shows that these elite investors have not lost their touch as top-notch stock pickers. Virtually all of their long portfolios beat most of the market averages, including the S&P 500’s 30 percent-plus gain, in some cases by huge margins, according to an Alpha analysis.
First, let’s look at several of the high-profile managers who had long-only funds for all of 2013 (and years prior). Last year Lone Pine Capital founder Stephen Mandel Jr.’s Greenwich, Connecticut–based hedge funds, including Lone Cypress, gained about 18 percent, net of the management fee but not the performance fee. Mandel’s long-only fund, Lone Cascade, rose 32 percent. Maverick Capital founder Lee Ainslie’s Dallas-based long-short Maverick Fund returned just 16.3 percent, but the Maverick Long fund finished the year up 34 percent. And Viking Global Investors founder O. Andreas Halvorsen’s Greenwich, Connecticut–based Viking Global Equities, the Norwegian native’s long-short fund, rose a very respectable 22.6 percent. The Viking Long Fund, however, surged 38.4 percent.
Lone Pine’s biggest winners were Michael Kors Holdings, 21st Century Fox, Valeant Pharmaceuticals International, MasterCard, Visa and FleetCor Technologies. Overseas, Lone Pine racked up big gains from Hong Kong–based Esprit, China-based Baidu, U.K.-based Rolls-Royce and U.K.-based Liberty Global.
Maverick benefited from strong gains in Priceline.com as well as Liberty Global and 21st Century Fox. Viking did well with Valeant and 21st Century Fox and to a lesser extent with Time Warner before it nearly halved its position in the third quarter.
The difference between the long and short portfolios is even starker at Tiger affiliate Jonathan Auerbach’s New York–based hedge fund firm, Hound Partners. Last year Auerbach finished the year up 16 percent after losing nearly 1 percent in December.
In a November letter obtained by Alpha, the hedge fund, which was up 17.23 percent through the first 11 months of the year, pointed out that its long portfolio had gained 38.75 percent before accounting for fees. The short portfolio had lost 14.43 through November. At the time, Hound was 96 percent long and 65 percent short. Auerbach is what is known as a Tiger Seed, because he received start-up investment capital from Robertson.
The story is similar at Greenwich, Connecticut–based Glade Brook Capital Partners, the hedge fund firm headed by Paul Hudson, an alum of Tiger spin-out Shumway Capital Partners. Last year its two funds, Glade Brook Global Domestic Fund and Glade Brook Global Offshore Fund, were up 21 percent after gaining 4 percent in December.
According to an analysis of its result through October that was obtained by Alpha, the funds had gained a net 13.8 percent and gross 17.2 percent. However, the firm’s long book was up 37.7 percent gross, while the short book had lost 17.4 percent. At the time, the funds were 46.5 percent net long equities.
Matthew Iorio’s Greenwich, Connecticut–based White Elm Capital Partners shared the same experience. The fund finished the year up 23.6 percent. Through the first three quarters, its long positions had gained 34.2 percent before fees and expenses, while its short positions had lost 10.29 percent, according to its third-quarter report, dated October 18, 2013. Iorio is a protégé of Lone Pine’s Mandel.
Historically, however, White Elm has made money on its short positions. From its inception in September 2007 through September 2013, the fund’s long book gained a gross 79.72 percent, while the short book rose 14.68 percent. “Since our launch in September 2007, we have a proven track record of generating alpha on both longs and shorts,” Iorio boasts to clients in his third-quarter report. He explains that his team looks to own stocks that can double over three years and to short businesses where it sees “a material misperception regarding their fundamental value.”
Even Greenwich, Connecticut–based JAT Capital Management, one among a minority of Tiger Cubs (and indeed hedge funds as a whole) to outperform the market last year, was heavily held back by its shorts. We noted last week that the long-short fund finished the year up 31.2 percent. In June, when it was up 18.4 percent through the first six months, the long portfolio was already up 29.7 percent, while the short portfolio was off by nearly 8 percent.
Will the recent results cause many of these Tiger Cubs to abandon short selling? Don’t bet on it.
As we pointed out several months ago, in his third-quarter letter to investors obtained by Alpha, Mandel concedes it is “inherently difficult” to sell short, asserting it is an uphill fight to make absolute dollars shorting except during a bubble.
“Opportunities to make significant money shorting stocks are sporadic and infrequent,” Mandel adds. In fact, it has occurred just twice in the past 15 years, the firm says, pointing to the Internet/telecom bubble and the mortgage bubble. But when they occur, “the profit opportunities are very significant,” he adds.
As a result, Mandel assures investors that shorting individual stocks remains an ongoing, active part of Lone Pine’s business. He adds, “We are poised with our pin for the next bubble.”
