Paul Hudson’s Glade Brook Capital Partners is launching a hedge fund that will be more aggressive than the firm’s existing hedge funds, according to its year-end letter to clients.
The fund, Glade Brook Gardiners Fund, will debut on March 1. Hudson describes the fund as “a levered vehicle” that “will help address the risk appetite of some of our investors.” Hudson also told clients in the letter, dated January 31, that the hedge funds will participate in the firm’s pre-IPO private equity strategies beginning this year, noting that the decision was made “after consultations with our limited partners.”
Hudson points out that Glade Brook Private Investors (GBPI), Glade Brook’s first pre-IPO private equity fund, returned about 219 percent net in 2013, driven by the appreciation in the equity value of Alibaba Group Holding. GBPI was formed to invest exclusively in the equity of privately held Alibaba, the largest e-commerce company in China, which is planning to go public sometime this year. Hudson said he believes these pre-IPO strategies will help the hedge funds to generate excess returns.
Greenwich, Connecticut–based Glade Brook was founded in October 2011 and has $933 million in assets, with $832 million in the firm’s hedge funds and $101 million in GBPI. Hudson worked for Chris Shumway’s Shumway Capital Partners from 2007 through 2011, most recently as a managing director and head of the communications, media and entertainment group. Glade Brook is among four hedge funds Shumway has seeded since he shut down his hedge fund firm in early 2011.
Last year Glade Brook Global Domestic Fund and Glade Brook Global Offshore Fund, the firm’s two hedge funds, returned 19.9 percent, which is more or less in line with how many long-short hedge fund managers performed. However, Hudson’s funds generated these gains with gross and net equity exposures of about 191 percent and 50 percent, respectively.
The long book kicked in 46.5 percent to performance. However, the short book offset those gains by 19.3 percent. “Losses were concentrated in index hedges,” Hudson tells clients in the letter.
One year ago Hudson told clients in the firm’s year-end letter that he planned to close his hedge funds to new investors after accepting a limited amount of capital during the first quarter of 2013. A year ago Hudson also left open the possibility of creating similar funds to GBPI, “when the opportunity is extraordinary and there is synergy with our ongoing research in the publicly traded TMT and consumer sectors.”
In the recent letter, Hudson said in 2013 his hedge funds made money in all sectors, except index hedges, led by media and entertainment and followed by the telecommunications, consumer and technology sectors. His best long performers in 2013 were Alcatel-Lucent, CBS Corp., Lions Gate Entertainment, Melco Crown Entertainment and SBA Communications Corp.
Looking ahead, Hudson says he is “constructive” on global equities. “We believe equity performance in 2014 is likely to be driven more by earnings growth than market multiple expansion, driving greater dispersion in single stock performance and a more balanced profit opportunity between long and short ideas,” he states in the report.
On the long side, Hudson is emphasizing companies with strong growth and “prudent capital allocation.” He also thinks the next 12 to 18 months will be an especially attractive period for event-driven strategies that benefit from a resurgence in strategic transactions and mergers and acquisitions.
“In the current low growth and low inflation environment, we believe the market will reward sustainable growth and shareholder friendly capital allocation more than usual,” he adds.
Hudson says there are many opportunities in global TMT — tech, media and telecom. He is focused on cloud-based software, U.S. and European media, U.S. wireless towers, global telecom equipment, emerging-markets Internet and Asian casino gaming stocks.
On the short side, Hudson sees opportunities in what he calls “secularly challenged companies” that have benefited from multiple expansion but face mounting pressures to earnings and cash flows, as well as so-called story stocks that trade “well above any reasonable assessment of intrinsic value and are vulnerable to a correction in valuations or operational miscues.” He plans to replace short index exposure with single-name short ideas, according to the letter.
