| John Burbank, Passport Capital (photo credit: Jacob Kepler/Bloomberg) |
Investors continue to abandon John Burbank III’s Passport Capital.
The hedge fund firm’s Passport Global fund suffered $67 million in net outflows in the third quarter, according to a client letter obtained by Alpha. Fund assets stood at $185 million as of the end of September, a decline of roughly one-third from the previous quarter.
Meanwhile, firm-wide assets amounted to just $835 million, down 7.2 percent from $900 million on June 30. Passport Capital had managed $2.3 billion as recently as the end of the first quarter of 2017.
Passport previously announced that it was closing its long-short fund, which had $636 million in April.
The hedge fund firm’s precipitous plunge in assets has coincided with lousy performance, which continued in the third quarter when Passport Global lost 5.1 percent. It is now down nearly 12 percent for the year. MSCI’s All Country World Index was up 5.3 percent in the third quarter, while the Standard & Poor 500 rose 4.5 percent.
During that three-month period, Passport lost 1.5 percent in non-equity investments, mostly on the long side, according to the client letter. In equities, the long book was up 3.6 percent gross, led by emerging markets, while the fund’s shorts lost 6.2 percent.
Passport declined to comment.
In the quarterly letter, the hedge fund firm pointed out that macro investing has changed in this central-bank-fueled era of persistent global liquidity, adding that it is hard to embrace what the firm deems a highly valued stock market.
“We have been used to an investing world punctuated by a five- or six-, sometimes a seven-year economic cycle related to changes in investment, politics, interest rates, etc.,” stated the letter signed by Burbank and Tony Fenner-Leitao, the firm’s head of marketing and investor relations. “We have learned, though, that since 2009 this environment has pushed this expansion to one of the longest of all time; it is difficult to predict how long it can go on with such consistent intervention.”
The duo told clients that Passport continues to focus on the “idiosyncratic themes/sectors/stocks” that are beneficiaries and losers of what they call the four Ds—demographics, debt, dysfunction, and disruption. “We have therefore generally focused on ideas that are uncrowded, unusual, and with specific value-creating catalysts,” they elaborated.
The letter goes on to say this approach provides the highest potential expected return over the long term, but will likely lead to losses in the short term. “With this approach and lens we continue to find many very interesting potential sources of return,” they wrote.
Virtually all of Passport’s net exposure is to MENA – the Middle East and North Africa region – and emerging markets. Specifically, Passport singled out Saudi equities, energy stocks, cryptocurrencies, Chinese consumer names, and “stocks like JBS and Tahoe Resources” as good examples of longs.
“Industrial distributors are an example of how to play negative deflationary consequences of technical disruption which is essentially the other side of the growth aspect of stocks like Amazon,” the firm stated.
According to the letter, “increasing insights into the digital or cryptocurrency space” have also increased Passport’s focus on potential public equity winners and losers “resulting from the disruptive nature of the blockchain.” Passport said it has successfully traded Bitcoin itself via a European exchange traded note.
Along similar conceptual lines, Passport said it is looking very closely at related areas in the public markets “such as proxies for the rise of custom silicon based on the unique needs of artificial intelligence and cryptocurrencies.”
In energy, Passport said it switched from being net short to net long as it became “more constructive” on crude oil, citing stronger than expected demand, good compliance from OPEC, and tempering expectations of U.S. shale producers.
