Discovery Capital Management rose 14.75 percent in November and is now up 46.97 percent for the year, according to its monthly report, seen by Institutional Investor.
This strong gain comes on the heels of last year’s 48.4 percent increase. This means the Tiger Cub headed by Robert Citrone will have put together one of the best two-year returns among all hedge funds.
In its 25-year history, Discovery has beaten the S&P 500 by an average 3.72 percent per year, says an investor. This is especially remarkable given that the firm went through a rough stretch from 2014 to 2019, losing money in five of the six years. Discovery specializes in a combination of macro and long-short equity.
Citrone worked at Julian Robertson Jr.’s Tiger Management from January 1995 until March 1999.
The firm made money last month in all asset classes in which it invests, in both emerging and developed markets. “These solid returns have been generated with relatively low net equity exposure,” Discovery noted in the November report, adding that it increased its net equity “tactically” last month. Credit accounted for 7.3 percent of November net returns, equities 4.9 percent, and currencies 2 percent, per the report.
Drilling down, Discovery generated “outsize gains” from select long positions in financials, led by government-sponsored entities and long positions in Argentina, which the firm said benefited from Donald Trump’s victory in the U.S., according to the report. It also had “meaningful” contributions from global tech, media, and telecom; “Trump trade baskets”; and, on the short side, China-related themes and select equities in Japan, the report says. The largest detractors of performance were shorts in regional banks.
For the year to date, credit kicked in nearly 26 percent to net performance, equities almost 14 percent, currencies 5.3 percent, and rates, 1.9 percent.
Discovery said that as of December 5 key themes have not changed. Rather, the biggest shift in the portfolio is its net positioning. Specifically, on the long side, it continues to have exposure to Latin America, “anchored in Argentina,” where Citrone has been bullish, especially since the election of a new president last year. The firm has bets on equities and sovereign bonds, both dollar- and peso-denominated. And it has positions in Mexican equities, although these were “significantly reduced.”
Discovery also has long positions in some U.S. equities — industrials, materials, and technology — and corporate debt. Other long positions include Indian equities, the Turkish lira, and the Nigerian naira.
On the short side, Discovery has bets against select U.S. financials, consumer, and technology stocks, which it stresses it “tactically reduced” after the election. It is short China through equities and currencies in China and Hong Kong and currencies in Taiwan. And Discovery is short Europe primarily through index exposure to subordinated bank debt, Japan across select equities and rates, and Israel through the shekel.
“We are more constructive in the short term on equity markets and have tactically taken our net equity exposure higher, led by the U.S.,” Discovery told clients. “We anticipate that the rally could continue through the inauguration as markets benefit from strong seasonals and what we see as the ‘honeymoon’ phase until Trump actually takes office.”
This said, the hedge fund did concede it is getting closer to taking down equity exposure and has less conviction that the Fed will cut rates on December 18, which Discovery asserted “would also be problematic for equity markets.”
