Christopher Hansen is the latest long-short hedge fund firm manager with roots to Julian Robertson Jr.’s Tiger Management Corp. to post sizable declines due to significant losses on the short side.
San Francisco–based Valiant Capital Management’s two hedge funds — Valiant Capital Partners and its offshore equivalent — posted a loss of 3.87 percent in April in its liquid portfolio after losing 4.68 percent in March. As a result, the liquid fund is down about 6 percent for the first four months of the year.
However, don’t blame its longs or private investments for Valiant Capital’s woes. Like those of Tiger Global Management and other Tiger-related funds, Valiant’s current losses can be traced solely to its shorts.
In the first quarter, longs kicked in 4.9 percent to performance while Valiant’s side-pocket investments — private investments that account for a little more than a quarter of the firm’s $2.4 billion or so in assets — added 5.4 percent, according to its first-quarter letter, obtained by Alpha. However, the shorts “detracted” by 5.5 percent, while macro cost the firm another 0.4 percent.
In April the same pattern seemed to persist, as the firm posted a slight, 0.06 percent loss in its side pockets, resulting in an overall loss of 3.08 percent.
Overall, including side pockets, the firm fell 0.71 percent in the first quarter and nearly 4 percent through April.
“Shorting has continued to be extremely painful,” Hansen told clients. “While our longs outpaced broad market averages by a significant amount, our shorts once again underperformed — with the losses in large part led by our highest-conviction short positions.”
Hansen is known as a Tiger Grandcub because he worked for seven years at Tiger Cub John Griffin’s New York–based Blue Ridge Capital.
In his letter, Hansen detailed how short-selling has undermined his overall portfolio and the reasons for these setbacks. Hansen seems particularly irked by this phenomenon.
He illustrates that his firm, which takes a more global perspective than many other long-short strategies, has lost money on its shorts in ten of the past 11 quarters, after making money on them in eight of the first 16 quarters following its August 2008 launch.
What’s going on?
For one thing, we are well into the seventh year of a bull market, and each time the market retreats, Hansen theorizes, investors have been “emboldened” to take on more risk rather than opt for caution. This strategy has worked for the most part for those who have been long but has been “downright brutal” for shorts, he said.
The pain has been widespread for short-sellers, where “there is no geography or sector to avoid,” Hansen said.
“We have seen parabolic melt-ups in frauds and bad businesses in nearly every geography where we are short, and in industries ranging from the obvious (tech, biotech) to basic industries with deteriorating fundamentals (Chinese aluminum producers, Australian retailers, Canadian financials) — with the only obvious commonality amongst these shorts being high short interest and sub-optimal liquidity,” Hansen wrote.
Hansen also pointed out that the market in general has become much more volatile. He noted that from January 1, 2015, through April 22, there were 31 days — or 39 percent of the total trading days — in which Valiant’s shorts were up more than 10 percent. What’s more, one quarter of its short book closed up more than 10 percent at least one day during this period. Hansen stressed that in most of these cases, there wasn’t even a “significant/material news event” to cause the stock’s upward move.
Hansen also pointed out that there is now a significant increase in long-short capital out there with a much lower tolerance for losses on shorts, an issue we noted earlier.
Hansen raised the critical question of whether he should significantly change his strategy. He concluded that he shouldn’t.
“We strongly believe that it is of paramount importance for us to stick to our strategy of owning great businesses, shorting terrible companies and staying close to market neutral,” Hansen said. “In addition to that being the strategy you all invested in, it is also quite simply what we are good at and I remain quite confident that despite this rough patch it will result in the best long-term returns.”
But clearly this means enduring a lot of pain and more self-examination, not just on Hansen’s part but among his long-short colleagues.
