As the year winds down to its final trading days, one firm that undoubtedly can’t wait to start fresh in 2017 is Passport Capital.
That’s because 2016 has turned into a disaster for the San Francisco–based multistrategy firm founded by John Burbank III in 2000. At least three of Passport’s key funds are down by double digits, and assets under management — including redemptions — have declined by more than 30 percent, to slightly more than $3 billion.
This does not include likely fourth-quarter redemptions, which would probably push year-end assets below the $3 billion mark. Passport declined to comment for this story.
Through November, Passport’s largest fund, the Passport Global Strategy Fund, had lost more than 15 percent, while the Passport Long-Short Strategy Fund had declined by 11.2 percent. Through October, the Passport Special Opportunities Fund had fallen 23 percent.
Passport reported managing $4.54 billion as of February 1, according to a regulatory filing. As of September 30, it had $3.6 billion, according to its website. Since the end of September, assets in the three funds have declined by at least $510 million, according to an HSBC document that tracks hedge fund performance. If you do the math, the firm had no more than $3.1 billion heading into December.
In the first quarter of the year alone, Passport suffered $70 million in net outflows across all of its funds, and roughly $170 million in the second quarter, or $240 million in the first half of the year, according to client letters obtained by Alpha. At least one investor that has redeemed from Passport is Anthony Scaramucci’s fund-of-funds firm, SkyBridge Capital. The firm declined to comment.
It is not known whether Passport has suffered redemptions in the second half of the year or how much. But there is no reason to believe the first-half pattern reversed, given that the funds extended their losses over the past few months.
A big problem for Passport is that it has been fairly bearish, or at least defensive, this year. Its funds have been positioned with a low net exposure to the market.
“Our overall positioning for well over a year has reflected serious concerns about the consequences of the ending of Quantitative Easing in the U.S.,” Passport told clients of its Passport Global fund in its first-quarter letter. “Investment funds began 2016 either both informed and cautious of broad deflationary risks facing global markets, or oblivious and positioned poorly for them. We believed 2016 would mimic 2008 with widespread deleveraging into illiquid markets.”
The firm remained cautious during the proceeding three months, when Passport told clients in its Special Opportunities Fund: “We remain wary of the divergent signals we currently observe in markets, as we have encountered increasing evidence of cyclical slowing in the U.S. economy. Broadly recognized sluggishness in business investment and reluctance of companies to invest in R&D have contributed to a slower pace of economic expansion.”
Passport added that over the longer term, it thought the world economy would remain vulnerable to further deflationary pressures, citing the slowing Chinese economy, demographics, the impact of technology, and changing spending patterns.
It was bullish on gold and gold equities as well as major Chinese internet businesses and negative on consumer discretionary, citing signs of U.S. consumer weakness and certain agricultural commodities markets due to oversupply.
Sure enough, Passport’s favorite gold stock, Detour Gold Corp., has halved in price since the end of June, although it is up for the year.
Passport’s two favorite Chinese internet plays, Tencent Holdings and Yahoo (because of its Alibaba Group Holding stake), are up 3.4 percent and 2.6 percent, respectively, in the second half of the year.
Of course, we don’t know which stocks the Passport funds have been shorting, which is critical, given Passport’s large short exposure.
In fact, shorts accounted for virtually all of the 9.8 percent gross loss reported by Passport Opportunities in the second quarter.
In the first quarter Passport Global Fund reported that shorts suffered a 9.6 percent loss in its equity book, which overall was down a total of 10.5 percent. Only strong gains in nonequity investments enabled the entire fund to report a loss closer to 6.8 percent for the period.
To be fair, both the Global and Special Opportunities funds stress they have way outperformed the Standard & Poor’s 500 stock index since their inception dates (2000 for Global and 2008 for Special Opportunities). However, both funds have sharply lagged the benchmark over the past five years.
And as Passport and many other firms that have been around even longer have learned, hedge fund investors have become highly unforgiving and are granting little credit for the longer-term performance or reputations of once-lionized hedge fund managers.
