Joshua Resnick is building one of the hedge fund industry’s best long-short track records.
The head of New York–based Jericho Capital Asset Management, which now manages close to $2 billion, posted a net gain of 33.85 percent in 2013 after gaining 24.4 percent the prior year. That’s compared with a 27.5 percent gain for the MSCI World Index and a 32.4 percent gain for the S&P 500 index. What’s more, Resnick has generated a 154.7 percent return since he launched his hedge fund in July 2009.
Of course, it helps that he has not had to maneuver through a bear market, having launched his fund three or so months after the start of the current bull market. Even so, Resnick has been able to outperform many of the better-known long-short managers, including most of the Tiger Cub community — managers whose roots go back to Julian Robertson Jr.’s legendary firm, Tiger Management Corp. — even though he has a fairly significant short book as well.
Resnick’s third-quarter letter, obtained by Alpha, provides a glimpse into his deft stock-picking ability. In that three-month period, the fund made nearly half of its profits for the year, rising 14.7 percent net of fees. Resnick’s long portfolio generated 25.3 percent gross gains, offset by a 7.4 percent loss on the short side.
In the fourth quarter, Jericho’s longs generated a gross 55.8 percent gain on an average gross long exposure of 102.1 percent. However, the firm said shorts cut into profits by 13.6 percent, calling 2013 “the most difficult environment for short-selling since Jericho’s inception.”
Resnick specializes in technology, media and telecommunications stocks, but he told clients in his fourth-quarter letter that he made money in every major sector and in every geographical region, including Latin America and emerging markets in Europe, the Middle East and Africa, where he notes the equity markets “were lackluster.”
“The fund’s fourth quarter performance was well-balanced as we generated gains in every major region and in each industry,” the letter states. The fund’s most profitable area in the fourth quarter was western European media. “No single position was a disproportionate driver of our gains in the quarter,” it adds.
Resnick’s most profitable position in the third quarter was a long position in Alcatel-Lucent, which he began buying in November 2012 after what he described as “a disastrous” earnings miss in the third quarter of 2012 sent the stock to an all-time low.
On the other hand, Resnick acknowledged that making money on the short side was “challenging,” explaining what most long-short managers have been complaining about — easy money has tended to lift all boats, driving “the most benighted secular losers” to double and triple from their lows. But Resnick stressed that he was sticking with his short strategy, focusing on identifying companies “facing idiosyncratic challenges which should be sustained regardless of the macroeconomic environment or the financing market,” he explains.
Resnick graduated from Emory University in 1995 with a BA in economics. After spending two years as a financial analyst at Bear Stearns in its media and entertainment group, he worked in 20th Century Fox Television’s business development group, reviewing mergers, acquisitions, joint ventures and investments, according to an article that appeared in Variety in 1999. He was involved in several high-profile deals, including News Corp.’s 50 percent asset purchase of Fox Entertainment Group/Liberty Media, the sale of American Sky Broadcasting to EchoStar Communications, and the partnership between the National Geographic Channel and NBC, according to the trade newspaper.
Resnick went on to become a managing director of KPE Ventures, a now-defunct venture capital fund that specialized in media, entertainment and technology. He then moved over to TCS Capital Management, a hedge fund, where he spent seven and a half years, eventually rising to managing director. He left in December 2008.
It is not clear where Jericho made most of its money in 2013. However, according to regulatory filings, Resnick liquidated sizable stakes in Google and TripAdvisor in the third quarter. So no matter when he sold during that three-month period, he stood to book huge gains on the positions. He also did well with two other large holdings through at least September — McGraw-Hill Cos., owner of Standard & Poor’s, and casino operator Melco Crown Entertainment.
Jericho’s third-quarter letter also provides a hint of where the hedge fund made money on the short side in the fourth quarter. One particularly intriguing position Resnick outlines is his bet against what he calls patent assertion entities, more commonly known as patent trolls. He explains that these companies develop or acquire patents and then try to monetize them through settlements and licensing agreements, often by threatening costly litigation. “Because PAEs do not make products or offer services, they are exposed to neither counter-infringement suits nor reputational risk,” he explains. “Hence, they are well-positioned to engage in such antagonistic tactics.”
A record 5,189 patent suits were filed in 2012, according to Resnick, who cites a study from PricewaterhouseCoopers. The number of suits tripled between 2010 and 2012. At the same time, the technological revolution has spawned an explosion in the number of broadly defined patents, Resnick adds.
So where is the short opportunity? Resnick makes the case that regulators and markets will take action “to make the PAE business model untenable.” He asserts that all signs suggest we are “rapidly approaching such a negative inflection point in the PAE life cycle.”
Resnick noted that in 2013 alone, Congress introduced six bills aimed at curbing PAE activity, backed by corporate giants such as Amazon.com, eBay, Facebook, Google, Macy’s, Microsoft Corp. and Wal-Mart Stores. Meanwhile, these days, sellers of patents are starting to demand immediate outlays, Resnick points out, adding that prices are rising rapidly. “As the market matures, we believe the arbitrage opportunities for PAEs are growing increasingly scarce,” he adds.
Yet, he says the investment community does not understand the industry. Coverage is limited, and the few sell-side analysts that do follow PAEs specialize in the industries targeted by the PAEs. And they are generally bullish on the PAEs’ prospects, “deriving their valuation estimates from historical trends and from simplistic per-patent valuation analyses,” Resnick asserts. “Few on the sell-side have considered whether the PAE business model is sustainable,” he adds.
Resnick then makes the case that six PAE companies that accounted for a combined $4.2 billion in equity value at the time have little, if any, underlying value in their businesses. The companies are Acacia Research Corp., InterDigital, Rambus, RPX Corp., Tessera, and Vringo. Sure enough, in the fourth quarter alone, two of the stocks tanked — Acacia fell 37 percent and InterDigital fell 21.6 percent — while the other four were either flat or slightly up or down.
