Hound Partners finished 2016 in the red, the first time the Tiger Seed suffered back-to-back losses. What’s more, the firm’s two long-only funds also sustained losses for the second straight year.
Sure, all three funds rallied sharply in the second half of 2016 following huge first-half declines. However, two consecutive years of losses must still be humbling for the New York hedge fund firm headed by Jonathan Auerbach, who has posted double-digit gains in each of his nine profitable years since Hound’s 2004 inception.
The Hound Partners Offshore Fund, the firm’s long-short vehicle, was down 2.3 percent for the year. Its long-only funds fared no better. The Hound Partners Long Fund fell 0.7 percent, while the Hound Partners Concentrated Fund was off by 3.5 percent.
The losses at the long-only funds are somewhat surprising, given that many long-short managers who lost money in 2016 fared very well in their long books. Not Hound.
In 2015, Hound Partners Offshore lost 1.3 percent on a net basis for the year after being up more than 18 percent at the end of July.
Hound Partners Concentrated dropped 7.6 percent; Hound Partners Long Fund fell 0.52 percent.
The two long-only funds, which launched in 2014, were closed to new money at the end of the first half of 2015.
Hound Partners Long aims to mirror the performance of the hedge fund firm’s long book. 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 Hound letter to clients from last July.
Hound Partners Concentrated is, as its name suggests, a more concentrated version of the long fund.
Auerbach is arguably the second-most-successful Tiger Seed after Tiger Global Management’s Chase Coleman. His firm managed $4.5 billion as of the end of 2015 after peaking at about $5.4 billion in August of that year.
Now the pressure is on, though. What caused Hound to lose its bark?
In 2015 the firm thrived and died with the huge swings in performance from two stocks: Canadian drug giant Valeant Pharmaceuticals International and Netherlands-based telecommunications player Altice. These names played outsize roles in the Hound funds’ early success in 2015 and subsequent collapse.
As we reported earlier, Hound finally threw in the towel on Valeant last June. By then its long-short fund was down about 16 percent for 2016. Hound Partners Long dropped 12.5 percent in the first half of the year, while Hound Partners Concentrated plunged 17.4 percent.
In its letter to clients for the first half of 2016, Auerbach said Hound was “purposely” but temporarily underinvested across all of its funds, including its two long-only vehicles.
He teased that he owns “one new name that’s taking the other side of a crowded/consensus trade” and another “that’s a small quirky special situation play on a complicated auction where there doesn’t seem to be much investment community interest.” Auerbach also said he took a stake in a company that went public in the past two years after being privately owned.
Specifically, Hound said it remained excited about its two largest U.S. longs, Spirit AeroSystems and Tesoro Corp., even though the latter was down 25 percent in the first half of 2016.
Sure enough, in the second half of the year, shares of oil refiner Tesoro rose nearly 17 percent, while Spirit, a maker of commercial aircraft structures, surged more than 35 percent.
Shares of hotel titan Hilton Worldwide Holdings, Hound’s third-biggest long, rose more than 20 percent.
On the other hand, No. 4 position ServiceMaster Global Holdings, a franchiser that sells and supports fire and water disaster restoration, fell about 5 percent in the second half of the year.
On the short side, Auerbach told clients in the first-half report that the book “feels as full as it has been in 24 months,” stressing that doesn’t consist of high-beta short positions. We don’t know how the specific shorts performed.
In any case, Hound had good momentum heading into the new year as it tries to reassure clients that the past two disappointing years weren’t the start of a new pattern.
