Christopher Hansen’s San Francisco–based hedge fund firm, Valiant Capital Partners, has seen a remarkable turnaround after the start of a seemingly disastrous year.
The firm lost more than 10.5 percent in the first two months of the year. That capped a three-month period during which the Tiger Grandcub posted a decline of nearly 14 percent going back to December 2015.
However, Valiant then abruptly reversed course. The hedge fund firm gained 6 percent in the second quarter and, after posting a gain of 3.83 percent in July, moved back into the black for the year.
This is better than many hedge fund firms with roots to Julian Robertson Jr.’s Tiger Management, which appear to be mired in red ink, many by double digits. Valiant’s dramatic turnaround also reflects the volatility (particularly early in the year) and unpredictability of the markets, a message Hansen conveyed to clients in his second-quarter letter, obtained by Alpha.
“We did not do anything different from the first quarter,” he wrote, noting that gross and net exposures were roughly unchanged, and most of the gains in the second quarter were the same longs and shorts that caused first-quarter losses. “In fact, many of the worst performing longs in the first quarter were the best performing ones in the second,” Hansen said in his letter.
Such is the life of a hedge fund manager — and many other money managers — in this mercurial market.
Hansen also attributes the firm’s abrupt reversal to quantitative traders and highly leveraged equity and long-short funds. “As these investors collectively reduced exposure when the market sold off, they effectively added selling pressure to many ‘high quality’ stocks, while simultaneously adding buying pressure to the shorts they were covering,” thus exacerbating underperformance, Hansen wrote. “However, as this deleveraging inevitably subsided, the trend began to reverse with high quality stocks trading back up and closing the gap with the major indices and shorts.”
The lesson: Be patient, Hansen counseled, especially in the face of repeated media reports about overowned hedge fund stocks and performance in general.
Valiant Capital Management is always an interesting firm to watch because about one quarter of its now roughly $2.1 billion in assets contained in its main hedge funds are invested in several dozen private companies.
Sure, firms like Chase Coleman’s New York–based Tiger Global Management has much more invested in privates, but most of these activities are conducted in separate portfolios structured like venture capital funds. And although Tiger Global’s hedge funds also include private investments, they accounted for only 7.4 percent of assets at the end of the second quarter.
Since its August 2008 inception, Valiant’s hedge fund has lost money only once, in 2013. Like many of the Tiger Management descendants, Valiant favors fast-growing TMT stocks — technology, media, telecommunications and Internet.
Its liquid portfolio has been leading the comeback, gaining more than 13 percent in the past four months, mostly due to its long positions. It has also made a little money on its shorts.
Valiant, however, has been held back by its private investments, which it refers to as side pockets. These lost about 1.75 percent in July alone after a flat second quarter. That portfolio is now down more than 8 percent for the year.
Valiant’s liquid portfolio generally has a strong emerging-markets exposure, especially to India. In the second quarter India accounted for more than three quarters of the liquid portfolio’s net exposure.
Valiant’s longs outperformed in India, Japan, the MENA region (Middle East and North Africa), Brazil, Indonesia, China and Canada, according to the second-quarter letter. Valiant underperformed in the U.S., Europe, “other” Asia and “other” Latin America.
However, its shorts, which accounted for a small portion of this year’s gain, were driven by positions in the U.S., Canada, Europe and Japan.
Entering July, Valiant’s largest long positions were Apple, which was also its largest long the previous quarter; online real estate firm Zillow Group; and social media giant Facebook.
Rounding out the top five were India-based HDFC Bank and China-based Internet giant Tencent Holdings. All but Zillow were among Valiant’s top five longs at the end of the first quarter.
Apple is flat after bottoming on February 11 following the market’s early-year sell-off. Facebook has rebounded more than 30 percent since its February low.
Zillow more than doubled from its early February low through the end of July.
