This has been an especially rough year for many long-short managers. And this was before last week’s Brexit vote, which roiled the markets and no doubt badly damaged many funds already mired in the red for the year.
As we have chronicled several times, not only are many funds losing money on their long positions, but their short bets are making things worse. So much for hedging, huh?
As we reported earlier, to rein in some of their risk, many of these funds have cut leverage and reduced their gross exposure this year. They are also reducing their net long exposure. Many prominent long-short managers have now reduced this exposure to a multiyear low.
One prime example is Jonathan Auerbach’s Hound Partners, which has aggressively slashed its bet on the markets over the past two months. The New York firm is also known as a Tiger Seed because it was founded in part by an investment from Tiger Management founder Julian Robertson Jr., who in return got an ownership stake.
In April, Hound cut its hedge fund’s net long exposure to 26 percent, its lowest level in years. Then in May the firm further cut the fund’s net long position to 21 percent. This was the fourth consecutive month Hound has reduced its long bet. This is also the lowest net long exposure the fund has had since February 2013. What’s more, in May, Hound cut the fund’s gross exposure to 144 percent, its lowest overall monthly bet on the market since February 2015.
Hound has been trying to stem large losses since last summer. Heavy losses in four of the five final months of the year caused the firm’s hedge fund to lose 1.3 percent in 2015, its first loss since 2008. The fund was down a further 12.53 percent through the first five months of this year, including a 1.34 percent loss in May.
Part of the problem is that it has lost money on both its longs and shorts.
Its longs are down 6.76 percent on a gross basis this year, while its shorts are down by 2.76 percent.
We don’t know how its two long-only funds are faring so far this year. However, keep in mind that one of them essentially mirrors the long portfolio of the long-short fund.
One of Hound’s problems is that in the first quarter the hedge fund firm lifted its stake in Valeant Pharmaceuticals International, which was its second-largest position at year-end. However, the controversial drugmaker’s ranking in Hound’s hedge fund portfolio has fallen, given the stock’s 80 percent decline in price this year despite a strong move up on Tuesday.
The firm’s “other” book was off another 2.5 percent for the year through May. The firm defines “other” as performance from fixed income and certain “hedged” positions. It explains that “hedged” positions may include equity stubs, capital structure investments and sector hedges.
We’ll know soon whether the reduction in its exposure and risk profile helped in June.
