| Dinakar Singh, TPG-Axon Capital Management (Bloomberg) |
Dinakar Singh’s TPG-Axon Capital Management posted slight gains in its main hedge fund in the second quarter. But the New York–based hedge fund firm is hardly celebrating, given that its TPG-Axon Partners fund and its offshore counterpart are up a mere 0.75 percent and 0.13 percent, respectively, through the first half of the year. “We obviously did a poor job so far in 2014,” the firm laments to clients in its second-quarter letter, obtained by Alpha.
Even so, the hedge fund remains unabashedly bullish, stressing that it is very upbeat about the future and confident it will outperform the market. This is down to “a few specific factors” that contributed to the underperformance but that the firm thinks will result in gains in the future.
“While acknowledging that it might seem overconfident, we think the potential return for the full year has gone up, if anything, relative to our expectations,” TPG-Axon states in the detailed, 68-page letter. “We never had as many high-conviction investments in the portfolio, all of which have unusually high potential for profit in coming months/quarters.” This is similar to the same confident song the firm sang at the end of the first quarter, when it lost money, however.
In the second-quarter letter, the firm outlined nine different investments that each account for at least 7 percent of assets. By contrast, only a few of the ten biggest investments were in what it calls “the large/supersize category” at the beginning of 2014.
Those nine investments with at least 7 percent of assets are French aircraft manufacturer Airbus, U.S. oil and gas exploration company SandRidge Energy, Japanese electronics conglomerate Hitachi, U.S. nutrition supplement retailer GNC Holdings (the fund’s worst performer in the first half of the year), Italian banks, Indian banks, Greek banks, U.S. hospital operator Community Health Systems, and U.S. department store chain Macy’s. Only three were among its largest investments at the end of 2013: SandRidge, Macy’s and Community Health.
TPG-Axon points out that its exposure and risk are now much higher than what it says is typical for the fund, stressing that the increased risk “is based on tremendous excitement about return potential.” As of the end of June, TPG-Axon was 151 percent long equities and 139 percent short, for a gross exposure of 290 percent, just slightly down from 305 percent the previous quarter.
Yet, more significantly, it was net long just 12 percent in June, down from 17 percent the previous quarter and below its average range of 15 percent to 20 percent over the past two years. “We remain skeptical of overall market value, and find many shorts that are attractive,” the firm emphasizes in the letter. By July 15 its net long exposure had drifted back up to 16.2 percent.
At the end of the first quarter, TPG-Axon’s exposure to Europe fell to its lowest level in years, but this positioning reversed sharply by the end of the second quarter, as it significantly lifted its investments in Greece and Italy. These days, TPG-Axon’s portfolio contains seven major themes: Japan; U.S. retailing, which it says is badly misvalued; selective opportunities in cyclicals, particularly aerospace and chemical restructuring; Indian banks; European banks; Chinese value stocks, especially cyclical stocks; and U.S. hospitals.
TPG-Axon explains, for example, that Japanese companies are currently undergoing a major restructuring. “Japan is the only place in the world where one can find companies with low valuations, low margins, and yet significant focus on improving margins and profits,” the report adds.
The firm tells clients that the Indian economy “is at a significant positive inflection point” and its banks are undergoing restructuring. It adds that some banks — especially Yes Bank — are trading at valuations “that give little credit for their ability to grow rapidly in years ahead.”
TPG-Axon significantly increased its exposure to Japan, specifically Hitachi, non-bank financials, real estate company NTT Urban Development and Suzuki Motor Corp. It also dialed up its investment in the U.S. retailing sector, singling out GNC Holdings. The firm also increased investments in themes and sectors including aerospace (Airbus); India (Yes Bank); Greece (Eurobank, National Bank of Greece and real estate company Lamda Development), and Italy (banks Banca Popolare dell’Emilia Romagna and Intesa). On the other hand, the fund firm signficantly reduced exposure to energy and Asia.
Singh co-founded the firm in 2005 with the private equity firm Texas Pacific Group. He previously was a partner at Goldman Sachs, serving as a co-head of the principal strategies department until early 2004. He earlier had spent four years in Hong Kong, establishing the firm’s proprietary investing effort in Asia.
