Has Christopher Hansen’s Valiant Capital Management gotten back on track after an ugly rough patch that began a year or so ago?
The short answer is, perhaps. The San Francisco–based manager — known as a Tiger Grandcub because Hansen previously worked for seven years at Tiger Cub John Griffin’s New York–based Blue Ridge Capital — is up more than 6 percent this year in his flagship fund after posting a gain of 10.65 percent in May. (So-called Tiger Cubs are managers who worked for Julian Robertson Jr.’s legendary Tiger Management Corp.)
This was Valiant’s second-best monthly performance since its August 2008 launch and the best since May 2009, shortly after the global bull market in equities got under way. It is also the fund’s sixth profitable month in the past eight months. It reversed a 4 percent loss over the first four months of the year after losing nearly 13 percent in 2013.
However, it is far from certain the gains will continue. In the second half of last year, the fund finally stopped three straight quarters of profuse bleeding, roughly breaking even in the September 2013 three-month period and then posting a gain of more than 4.5 percent in the fourth quarter. There was a lot of hope that the hedge fund firm — which manages a total of $2.4 billion — was finally going to get on a profitable course this year. But then it lost 4.5 percent in January.
So what accounts for these wild swings? In a word (or two): emerging markets. These markets generally account for a majority of the global long-short equity fund’s long exposure and a vast majority of its net exposure.
In late 2012 and early 2013, the fund was especially hurt by bets on India and Brazil and, to a lesser extent, Indonesia and South Africa. In addition, its short positions in the developed markets got hammered during the 2013 bull market while the longs lagged.
It is a stance from which Valiant refused to waver, however. “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,” Hansen wrote in his third-quarter 2013 letter to clients.
Hansen has been rewarded lately for sticking with this strategy. However, he continues to be hurt by his shorts, calling them “the primary detractor” to first-quarter performance. But he is standing pat.
“When you deviate from the pack and don’t perform, you tend to look really stupid and are undoubtedly presented with an abundance of advice, questions and criticism from both investors and peers,” Hansen tells clients in the first-quarter letter. “Accordingly, maintaining conviction through tough performance patches is likely the greatest challenge in our business . . . but also the one that separates the truly great from the average. By its very nature outperformance can’t be consensus.”
Hansen remains heavily committed to his emerging-markets positions. In the first-quarter letter, he told clients that many emerging-markets economies had begun to recover “with better market conditions and fundamentals anticipated over the next 12–24 months.”
Indeed, as of the end of May, the fund was 38.5 percent net long, according to Valiant’s May report, down slightly from about 41 percent at the end of the fourth quarter
However, it was a tad net short U.S. stocks at the end of May. Rather, it is still betting the fund on India, where it was 31 percent net long, up from 27 percent just two months earlier. It is net long on Brazil by 6.4 percent. Otherwise, it was no more than 5 percent net long in any other region.
Yet four of the fund’s top five longs were those well-known technology, Internet and media stocks that have driven the momentum rally and are among the most popular stocks among Tiger descendants. Apple, by far its biggest position; Google; the Priceline Group; and Liberty Global combined account for 25 percent of its adjusted exposure. So far this month Apple is up less than 1 percent, Google is up less than 2 percent, Priceline is down 4.5 percent, and Liberty Global is down nearly 4 percent.
However, India-based Jindal Steel & Power — the fund’s fourth-largest long position — is up more than 11 percent this month. Altogether, the India stock exchange is up nearly 5 percent this month. The Brazilian market is up more than 7 percent this month.
Meanwhile, the fund’s side pocket investments — which are mostly private equity–type investments in private companies and account for about 17 percent of the fund’s total assets — were up 4 percent for the first five months. In May alone it made two small add-on investments to two fairly large existing holdings: Pinterest, the social media company, and Spandana Sphoorty Financial, an India-based microfinance company.
Hansen and Valiant’s determination to stick to their conviction has pervaded the firm’s culture. In his first-quarter letter, Hansen tells clients the firm has developed what he calls “a collective chip on its shoulder” and is eager to prove skeptics wrong.
“While ‘chips’ can certainly prove harmful if they lead to blocking out constructive criticism or refusing to acknowledge mistakes, in most cases I think the positives far outweigh the negatives,” he adds. “The very definition of a ‘chip’ implies that you have refused to succumb to self-doubt and pity, have retained your self-confidence and have not only effectively absorbed the external negativity, but have actually channeled it into positive energy that can serve as ‘fuel’ to drive you to future success.”
Now Hansen just needs to build on May’s gargantuan gain to prove the skeptics wrong.
