Jonathan Auerbach’s Hound Partners is closing its long-only funds to new money just 18 months after their launch.
In the New York-based firm’s July 17 letter to clients, obtained by Alpha, Auerbach says he has reached his capital goal and therefore “won’t be taking any material amount of additional capital until at least 2017, barring an exceptional market opportunity or other unusual circumstances.”
Auerbach — a so-called Tiger Seed because was initially staked with money from Tiger Management Corp. founder Julian Robertson Jr. — says he will replace redemptions, but figures they will be low in any case.
“We were uncharacteristically aggressive in raising this capital as we liked the concept of a hedge fund-run long-only product, our portfolio, and the ample liquidity in our long names,” he states in the letter. “While we’re only in the first mile of a marathon, the results speak for themselves so far, and we’re pleased that we could capture this upside for the early backers of these funds.”
We reported earlier this year that Hound said in its year-end letter it was looking to raise $500 million for its long-only funds. The firm also said at the time that it was opening up $100 million of capacity for its hedge funds, available only to existing investors.
In 2014, Hound launched the two different long-only funds. The Hound Partners Long Fund and an offshore counterpart mirror the long book of Hound Partners, the firm’s long-short hedge fund. The biggest difference is that the long-only fund is generally fully invested and excludes companies whose market capitalizations are below $2 billion or are “names that trade like small-cap companies,” according to a description of the fund in an earlier Hound letter.
The firm also launched the Hound Partners Concentrated Fund and an offshore equivalent, which are concentrated versions of the firm’s long fund. In its first-half 2014 letter, Hound said two thirds of investor demand was for the concentrated version of the fund.
Hound only sends two reports to clients each year and only discloses its results for the long-only funds once each year, asserting that this practice reflects “the even long-term horizon we encourage our partners to take for those funds.”
Hound Partners posted a 17.23 percent gross gain and a 13.12 percent net gain for the first half of 2015, according to the July 17 letter. The long equity portfolio rose 18.32 percent on a gross basis while the short equity portfolio lost 1.14 percent gross over the same period. The firm did not report performance results for the long-only funds.
Hound Partners said earlier that in 2014 the Hound Partners Long Fund beat the Standard & Poor’s 500 by 4.89 percentage points, which means it was up 18.59 percent, while the Concentrated fund beat the benchmark by 6.91 percentage points, meaning it was up 20.61 percent.
In the July letter, Auerbach warns investors not to expect a straight upward path in the second half of the year, asserting: “We want to emphasize that our results will likely be lumpy and bumpy going forward. It’s unrealistic to expect the performance to which we aspire without periods of underperformance.”
He is proud of the long book’s success, adding: “The book is now filled to the brim with exciting ideas.”
Performance gains came from its largest positions, such as Valeant Pharmaceuticals, Altice — the Swiss-based cable and telecom giant — and aircraft parts maker Spirit Aerosystems. It also did well with children’s clothing retailer Carter’s, Constellation Software and, to a lesser extent, Ctrip.com, the Chinese travel website.
However, Auerbach is clearly frustrated by his short-selling woes, telling investors: “We are still struggling to find the type of idiosyncratic shorts that we love at Hound.”
Stressing that he wants to make money on his short positions too, Auerbach says he has 15 full-time analysts who spend two-thirds of their time researching single-name shorts. And he asserts that his compensation policy does not tilt toward rewarding long ideas.
Auerbach advances several theories for the difficult short-selling environment. For example, he posits that Sarbanes-Oxley and Dodd-Frank have actually led to “less garbage going on.” Tell that to the critics of those two pieces of legislation.
Also, low interest rates and borrowing costs have all but eliminated what Auerbach calls the “balance sheet short” by pushing off the day of reckoning. He also theorizes that the very difficult environment for borrowing shares to sell short has led to a decrease in chatter and sharing of short ideas among managers, reducing “sourcing.”
“We believe the majority of the issue is that for whatever reason, the opportunity set isn’t as rich as it has been in the past,” Auerbach concludes, although he also suggests that perhaps the firm has been growing “overly risk-averse.”
But he adds: “We’re working very hard to upgrade the quality of the short book, and we have all our oars in the water pulling hard to accomplish this goal.”
We’ll be watching.
