| Dinakar Singh of TPG-Axon (Bloomberg) |
Dinakar Singh’s TPG-Axon Capital Management is off to a strong start this year after losing money in 2014. The New York hedge fund firm’s main funds — TPG-Axon Partners and TPG-Axon Partners (Offshore) — rose 3.6 percent and 3.8 percent, respectively, in March, and 5.2 percent and 5.4 percent, respectively, for the first quarter, according to the firm’s first-quarter report to clients, obtained by Alpha. The firm made money in each of the first three months of the year.
The mostly equities funds lost 4.79 percent in 2014. However, they were up 19.11 percent in 2013 and 18.86 percent in 2012.
The biggest gains in the first quarter came from European aerospace and defense company Airbus Group, a big loser for the funds in 2014, and European and Indian banks.
“We made several adjustments towards year-end which have served us well,” the letter said. For example, the firm “sharply reduced or exited” investments where, it said, “macro had overwhelmed micro.” For example, it cited SandRidge Energy, an oil and gas exploration company hurt by falling oil prices; Greek investments battered by the debt crisis; and to a lesser degree, Indian banks and Indian stocks in general.
TPG-Axon also attributed its strong quarter to “improved portfolio diversity” and greater selectivity and in some cases a “supersizing” of its largest positions. “On reflection, last year our largest investments dominated our portfolio a bit too much, and created greater volatility than we felt was ideal,” the letter said. “While still highly concentrated, we think our portfolio performs better with a more normal distribution of investment sizes.”
The funds posted strong first-quarter gains even as the equity portfolio finished the period 3 percent net short — 142 percent long and 145 percent short. The report pointed out that overall net exposure ranged from minus 5 percent to plus 20 percent for most of the quarter.
TPG-Axon’s biggest net exposure remains Asia. The firm is neutral in Europe and has “more shorts than longs in the U.S.”
Singh co-founded TPG-Axon in 2005 with private equity firm Texas Pacific Group. He previously had been 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.
In general, TPG-Axon’s portfolio has moved away from the U.S. over the past the three years. “In 2012, opportunities in the U.S. were simply more attractive than elsewhere, particularly in sectors like cable/media,” the firm explained. “However, for us, that pendulum has been steadily swinging in the other direction since then.”
The firm stressed that the issue is not valuation, noting it goes long and short. “Rather, the ability to find dislocations and bargains has been better elsewhere,” the letter said.
TPG-Axon seemed to imply the U.S. market is more efficient, noting that there are “tremendous amounts of investor focus and research analyst coverage,” which makes performance more difficult. However, outside the U.S., it says, “competition” is much less.
“And, as long/short funds seem to have largely focused on the U.S., macro traders have dominated international markets, creating frequent distortions that in turn create exceptional long/short opportunity,” the firm added.
TPG-Axon said that it has significantly increased its exposure in Japan and China, in U.S. consumer shorts and in European exporter shorts.
The firm has also made new “large-size” investments in Tyson Foods, Time Warner Cable and Chinese banks.
Its largest long exposure, however, remains to European banks, followed by Japanese conglomerate Hitachi.
“Despite enormous pain in French/Italian banks last year, we continued to have conviction that our thesis in both would eventually be recognized, and maintained sizable investments,” TPG-Axon said, referring to its big bet on European banks even as it sharply reduced Greek bank exposure late last year and continued to exit this year. “As global investors have swung from deep pessimism to wild exuberance regarding Europe, our European bank investments have clearly been beneficiaries.”
