Several of the most prominent Tiger Cubs and Seeds were solidly in the black last year. However, one of the largest and most successful firms with roots in Julian Robertson Jr.’s Tiger Management was severely roughed up in the second half of the year.
Jonathan Auerbach’s New York–based Hound Partners posted its first loss in its long-short fund since 2008 and absorbed only its second full-year loss since its October 2004 launch. The fund, Hound Partners Offshore Fund, did gain 0.44 percent on a gross basis but lost 1.3 percent on a net basis for the year.
The hedge fund posted a 2.15 percent gross gain from its shorts, which more than offset its 0.76 percent loss from its longs. It also lost money from what it calls “other,” which includes interest income, expenses and other strategies.
Hound’s two long-only funds also finished the year in the red. Hound Partners Concentrated Fund, Ltd. lost 7.6 percent, while Hound Partners Long Fund, Ltd. slipped 0.52 percent.
This is a big setback for the two long-only funds since their 2014 launch. At the end of the first half of 2015, Hound closed the two funds to new money.
The Hound Partners Long Fund 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 description from an earlier Hound client letter.
Hound Partners Concentrated Fund is, as the name suggests, a more concentrated version of the long fund.
Auerbach is perhaps the second most successful Tiger Seed after Tiger Global Management’s Chase Coleman. Hound Partners had $5.4 billion under management as of August 31. Its $2.75 billion long-short fund has compounded at a little less than 13 percent since inception. Hound has also posted double-digit gains in every profitable year.
In the first half of 2015, Hound looked like it was well on its way to exceeding its average performance, surging about 18 percent through July.
But it was all downhill after that.
As it turned out, Hound lived and died in 2015 over the exaggerated movements of two stocks: controversial Laval, Canada–based drug company Valeant Pharmaceuticals International and Woerden, Netherlands–based telecommunications company Altice. The two stocks played a major role in the fund’s surge in the first months of the year and subsequent collapse. At one point, their peak-to-trough decline was about 70 percent.
Both companies stand out in their respective industries for seeking high margins and then having to prove they can sustain them. Valeant does this with existing products, while Altice tries to sustain its high margins with new assets.
Valeant has become a lightning rod for critics of skyrocketing drug prices. The company has also faced questions about its relationship with Hatboro, Pennsylvania–based specialty pharmacy company Philidor Rx Services, which Hound admitted in its year-end letter that it “didn’t uncover” in its research, conceding that it “simply underestimated the risk of the aggressiveness of the company’s [Valeant’s] business plan.”
Altice has faced a variety of questions over its planned acquisition of Bethpage, Long Island, cable giant Cablevision. “We underestimated the challenge of transitioning from managing a privately held company to managing a public company,” Auerbach said in the letter, which the firm sends to investors twice a year.
Even so, Hound is sticking with the two investments. Auerbach told clients that either the stocks will rebound and the hedge fund firm will be rewarded, or Hound will be proven wrong due to “some combination of a flaw in the business model, changes in debt-funding markets or further management missteps.”
However, Auerbach told clients that he’s confident “the risk/rewards are quite favorable from here.”
Hound did have some winners among its other 20 or so longs, led by Tesoro Corp., a San Antonio–based oil refining and marketing company; Toronto’s Constellation Software; and Wichita, Kansas’ Spirit AeroSystems, which makes large commercial aircraft structures.
Like most hedge fund firms, Hound Partners does not discuss specific names of open shorts, but did say its largest winner was “a fixed-line telephone company that’s too levered and too dependent on landline telephony.” Hound also shorted the company’s debt, the first time it has done so as part of an equity short play.
