Jonathan Auerbach, a descendant of Julian Robertson Jr.’s Tiger Management Corp. network, has become more bullish in the past two months — at least by his standards.
The founder of New York–based Hound Partners, which has posted a gain of 2.3 percent this year despite getting mauled in March, has lifted its net exposure to the stock market over the past two months. In April the firm lowered its gross exposure from 157 percent to 151 percent, according to a one-page tear sheet sent to clients and obtained by Alpha. More significantly, however, it raised its net exposure to 34 percent from just 23 percent the previous month and maintained it at 33 percent in May.
This is a historically high level for Hound. For example, its net exposure over the past two months is the highest it has been since late 2012, when it ranged between 33 percent and 35 percent in November and December of that year. Otherwise, the last time net exposure rose as high as 33 percent was in February 2011.
Still, this is not exactly what you call ramping up the risk. Indeed, this is Auerbach’s investment style in general. After the fund posted a 16.28 percent net gain in 2013, Auerbach stated in his year-end letter, “Our low net exposure (a signature of Hound) prevented us from keeping up with the broader indices, but that’s never our expectation in a market as robust as 2013.”
Auerbach is what is known as a Tiger Seed, because he received start-up investment capital from Tiger Management founder Robertson. Auerbach co-founded his firm with Scott McLellan in 2004 while working at Tiger Management. (In 2007 McLellan left to launch Marble Arch Investments with Tiger alum Timothy Jenkins.) Auerbach previously served as a senior analyst at Ziff Brothers Investments before joining Tiger Management.
Hound’s limited exposure to the overall market has enabled it to be one of the most consistent performers among long-short equity hedge funds — and Tiger descendants in general. It gained 18.6 percent net in 2012 and 19.1 percent net in 2011. Its gross return has been in a narrow range of 21 percent to 23 percent in each of the past five years, underscoring its long-term consistency in the face of different market environments.
Earlier this year Auerbach launched Hound Partners Concentrated Fund and an offshore equivalent. He also launched Hound Partners Long Fund and an offshore counterpart, which mirror the long book of Hound Partners, according to its year-end letter.
Auerbach was no doubt inspired by his long book’s strong performance. For example, in 2013 alone the long equity portfolio contributed 40.86 percent to the gross return, according to Hound’s year-end letter.
In 2012 the long portfolio returned 18.55 percent gross, while the short book kicked in an additional 3.02 percent. That year the S&P 500 gained 15.83 percent, including dividends reinvested.
Drilling down into the portfolio — or at least as far as Hound discloses — the hedge fund is seemingly most positive on large-cap stocks, defined as exceeding $10 billion in market capitalization. Hound is 92 percent long and 59 percent short issues of this size. On the other hand, it has no long exposure to small caps, defined as less than $2 billion in market cap, and is 21 percent short these companies.
At the end of May, a health care stock was its largest long position, accounting for 13.2 percent of assets, followed by two different consumer discretionary stocks. Its four largest shorts include two telecommunications stocks and two electronic components stocks.
Hound does not identify the stocks by name. However, based on its 13F filing for March, the health care stock is probably Valeant Pharmaceuticals International, its largest holding at the end of the first quarter, accounting for 13.7 percent of $2.34 billion in assets. This is the company that teamed up with William Ackman’s Pershing Square Capital Management to make a hostile bid for Allergan.
Hound’s next four top stock holdings were children’s clothier Carter’s, cable giant Charter Communications, oil refiner Tesoro Corp. (it also held call options on the stock) and FleetCor Technologies, which provides various kinds of payment cards for businesses.
