SAC Capital Advisors alumnus Jason Karp is presiding over one of the fastest-growing, and top-performing, new hedge fund firms these days.
Karp’s New York–based Tourbillon Capital Partners manages more than $2.5 billion, which is ten times the $250 million Karp had when he launched his long-short fund at the beginning of 2013. That is quick, folks.
A tourbillon is defined as the vortex of a whirlpool or whirlwind. Watchmakers appropriated the term when they developed mechanisms that aim to defy the effects of gravity in a timepiece mechanism. Both are appropriate for a hedge fund firm.
Karp has combined strong performance with savvy marketing and self-promotion and a somewhat different story to tell in an otherwise cluttered hedge fund marketplace.
About one-quarter of Tourbillon’s growth has stemmed from organic growth, that is, performance, the firm told clients in its first-quarter letter.
The firm’s funds — Tourbillon Global Equities and its offshore equivalent — surged 7.8 percent in May and are now up 16.8 percent for the year, making Tourbillon one of this year’s top performers.
This follows a 10.05 percent gain last year and a 20.69 percent advance in 2013, the year Karp launched the firm.
As a result, Karp recently closed his funds to new investors for the third time. Each capital raise has been oversubscribed.
Karp had been a partner and co-chief investment officer at Carlson Capital, working closely with founder Clint Carlson before leaving in 2012 to start Tourbillon.
Before that, he had served as a portfolio manager of global equities and the director of research at CR Intrinsic Investors, which was part of Steven Cohen’s now-defunct SAC Capital Advisors. Prior to SAC, Karp had been a partner and portfolio manager at George Weiss Associates, a multistrategy hedge fund, where he worked as a quant.
Karp was also an Academic All-American and Academic All-Ivy squash player at the University of Pennsylvania, where he graduated summa cum laude with a BS in economics with a concentration in finance from the university’s Wharton School of Business.
Like many hedge fund managers, Tourbillon specializes in long-short equity, with an emphasis on technology, media and telecommunications (so-called TMT), health care and consumer stocks. As a result, Tourbillon almost resembles a Tiger Cub. The firm believes these sectors are where the fastest-growing companies reside.
However, Tourbillon differs from many other long-short funds in a number of ways, which is how the firm tries to differentiate itself.
For one thing, Karp normally maintains a very low net exposure. His net exposure stood at 30 percent at the end of April, which is higher than its historical average of 19 percent.
Most long-short managers typically settle between 40 percent and 60 percent net long.
However, Tourbillon’s net exposure is actually overstated since it aggressively uses options to hedge. So, it likes to tell investors it has zero net beta. In other words, all of its gains are the result of individual investment decisions. And it does not use much leverage.
The firm’s goal is to make money in up and down months. And so far it has pretty much succeeded. Tourbillon has posted losses in only five of its first 29 months of operation, all of them from last year.
How has Tourbillon pulled this off? The firm tells investors it uses a combination of bottom-up stock picking, using what it calls behavioral finance and quantitative discipline.
Behavioral finance means watching how stocks move and how other investors behave under varying circumstances as events unfold. It is a nuanced, subtle study of sometimes irrational biases in the market. These biases can cause large discrepancies between a stock’s price and its inherent value, and Tourbillon tries to profit from them.
“As the markets keep getting more crowded with a short-term focus on getting paid in the current quarter, we are finding more and more opportunities like Ctrip and Amazon,” Karp wrote in his first-quarter letter. “We are arbitraging others’ risk tolerance and others’ time horizon.”
Karp and his team also try to exploit the herd mentality of commodity trading advisers, many of whom more or less ride similar trends, and exchange-traded funds.
They also draw on some quantitative disciplines, using data and analysis to focus on what drives stock prices.
And although Tourbillon trades more often than other long-short managers, it also has a number of long-term holdings. For example, the firm has owned Ctrip.com International, a mainland China travel–oriented Internet company, and Dish Network since the firm’s inception.
In the first quarter, Tourbillon generated a 12.7 percent gross gain on its longs and a 2.9 percent loss on its shorts, for a gross long-short spread of 9.7 percent. “Health care had a stellar quarter once again and made money on both the long and the short side,” Karp told clients in his first-quarter letter, obtained independently by Alpha. This was driven by long investments in Horizon Pharma, BioMarin Pharmaceutical and Valeant Pharmaceuticals International.
After the quarter, the firm “significantly reduced” its gross exposure to health care, asserting “the opportunity set is less robust than in the previous three quarters.”
Among the so-called TMT stocks, Tourbillon did well on Ctrip.com, Amazon.com, NXP Semiconductors and Expedia as well as various financials.
And while its biggest losers in the first quarter were shorts, its strong May performance was driven by two retailing shorts, Urban Outfitters and Dillard’s, according to an individual familiar with the firm.
As of May 5, when the letter was dated, Tourbillon’s largest long positions were a new position, Energizer Holdings, plus Expedia, Amazon and Ctrip.
Karp told clients in the letter that in Energizer he saw at least 50 percent to 70 percent “upside potential over the next 18 months if the management team is able to execute properly.” Last year the company announced plans to divide into two separate companies — Energizer, which will retain its signature battery business, and Edgewell Personal Care Co., which owns brands such as Schick, Hawaiian Tropic, Wet Ones and Playtex.
Karp also devoted a fair amount of the letter to his short of MannKind Corp., a biopharmaceutical company that specializes in therapeutic products for diabetes. “We are becoming more convinced that MNKD equity is worthless,” Karp argued, citing 14 weeks of what he described as “a disastrous drug launch and with much more data and research.” Karp said he had “correctly anticipated a poor launch” of one of its drugs nine months ago when the stock was trading at $10 per share. Mannkind is now trading at $6.12.
Karp seems to understand the importance of self-promotion. While his funds were posting strong returns, he was getting his own and his firm’s name out in front of the investor community.
In May 2014 he was one of a handful of Next Wave presenters at the Sohn Investment Conference in New York, where he made the case for going long on Ctrip.com, comparing it to the Priceline Group in 2008, “with faster growth and more opportunity.”
In May, Karp made headlines when he told attendees of the Milken Institute Global Conference that he uses a former CIA interrogator to conduct personality tests for prospective hires. He said he is mostly looking for whether traders and analysts display an “openness to change” their opinion or view on a trade in the face of conflicting information. “And I found that [openness to change] combined with a variable that in psychology is called ‘grit’ — in our business we call it ‘resilience’ — those are the two factors we search for the most,” Karp reportedly said.
Karp apparently needs people who are prepared for the kind of volatile environment he is preparing his investors for. He said in the first-quarter letter: “Investing will get progressively harder in the shorter time frames and progressively easier, albeit with more volatility than most can handle, in the longer time frames.”
Hence, the perennially low net long exposure.
