Things are rapidly changing for the hedge fund world, and not just in terms of chronically underperforming the S&P, which as the following chart from Goldman demonstrates, they have on 10 of the past 14 years, leading to relentless redemptions…
… but also in terms of crushing once pristine, seemingly untouchable reputations. Case in point: famed stock picker Julian Robertson and his Tiger Cub”proteges have ruled the Wall Street jungle for decades. After a down 2016, their reign is being challenged.
As the WSJ reports, for the year, hedge-fund losses at Tiger Global Management LLC were roughly $900 million from a 15.3% loss. Lee Ainslie’s $11 billion Maverick Capital Ltd. was down more than 10% in its flagship fund. Andreas Halvorsen’s $30 billion Viking Global Investors LP and Stephen Mandel Jr.’s Lone Pine Capital LLC were down 4% and 2% respectively in their main funds, while Coatue Management LLC was up 2%. They all badly underperformed the broader market which returned 12%, and is not only actively managed by central banks, but does not request “2 and 20” to jump aboard for the ride, nor does it have minimum capital requirements.
These “Tiger Cubs,” a generation of hedge-fund firms founded by traders who once worked for Mr. Robertson at his Tiger Management, are among the wave of stock hedge funds that fared poorly in 2016.
The MSCI AC World index gained 8.5% for last year excluding December, but equities hedge funds captured just 20% of that return, according to Morgan Stanley. That relative return was the second worst since the 2008 financial crisis.
The chronic bleeding should not come as a surprise to regular readers: ever since 2010 we warned that in the “new paranorma”, where fundamentals have zero impact on asset prices, and only central bank balance sheets matter, those who rely on convential financial metrics to help them invest or, worse, actively short in hopes of a stock – or market – crash, will be lost. Sure enough, those most dependent on fundamentals, or “bottom-up” stock pickers like the Tiger Cubs, were among the hardest hit. These types of managers make their investment decisions by talking to management teams and poring over corporate filings, among other research.
Sadly, almost none of tha matters in a world of pervasively cheap credit which permits zombie companies to continue their existence indefinitely, regardless of growth, balance sheet, or cash fow constraints.
This is how the WSJ explains the death of fundamental analysis-based investing.
last year’s markets were difficult for Tiger Cubs and other bottom-up investors because companies often didn’t rise or fall on their individual fundamentals. Instead, entire sectors of the market traded in lockstep, such as when energy companies rallied during the first half and when financial stocks surged after the presidential election of Donald Trump on expectations of economic growth. Stocks that traditionally were more expensive and had strong growth prospects also sold off, another development that surprised some of these managers. Those stocks had driven funds’ gains last year.
Thank the pervasive shift to passive investing and ETFs that have made thousands of stocks trade as one; also thank HFTs whose only goal these days is to stop out investors as “max pain” levels, and finally thank central banks that the market hasn’t made any sense in years.
Still, some refuse to give up the faith: “It’s too early to say that fundamental stock picking is dead; it’s hard to envision a world with only robots and passive investors,” said Greg Dowling of Cincinnati-based Fund Evaluation Group, which advises on roughly $60 billion of client money. But “opportunities may be more episodic.”
Robertson, who declined to comment through a spokesman, started Tiger in 1980, and the firm went on to become one of the most successful private investment funds in the world, managing more than $22 billion at its peak. He still claims among the best long-term track records in the investment world, at about 25% a year. It all ended in 2000 when the firm returned client money after losses and investor defections.
In retrospect, it is far better that Julian is not active in today’s market, which is a farcical, grotesque version of what he was familiar with in his heyday. Instead, Tiger has become a “seeder” which backs smaller hedge funds, while Robertson’s former employees collectively manage more than $100 billion in some of the industry’s biggest funds. Alas, they also frequently show up in the same trades, a result some of them ascribe to their shared investment philosophy. The resulting hedge fund hotels usually end up in flames once someone yells “fire” and a stampede for the illiquid exists begins.
There is some hope in the new years. Since the election, some traders have predicted the environment for stock picking would improve, as a result of a plunge in cross-equity correlations and a surge in dispersion. Trump’s plan for deficit spending, tough talk on trade and taxes and lighter regulation for banks, pharmaceutical companies and other industries should also mean increased volatility (if not yet). They say that volatility, plus the waning of central banks’ global bond-buying programs, could break the quiet markets traders have complained about in recent years. Some faint glimmers of hope: Coatue, Maverick, Tiger Global and Viking gained in January, with Tiger Global up 5.5%. All those gains may evaporate overnight following another Amazon, Netflix or Valeant implosion.
So the “Tiger Cubs” are taking steps to lock in profits.
Mandel of Lone Pine has become much more focused on whether the positions that the $28 billion firm holds are included in the holdings of ETFs. Lone Pine began collecting data on these issues more systematically last year. That did not help the bloodletting however, and investors redeemed 10% of their money from Lone Pine last year, a higher percentage than in past years.
Viking hired from Goldman Sachs Group Inc.Samer Takriti, “an experienced risk quant and Ph.D.,” to help the firm increase its awareness of forces that can affect its portfolio, Viking said in its year-end letter.
Meanwhile, Maverick, which rolled out a quant effort in 2006 to inform its investment process, is doubling down on losing bets from last year.
“The large majority of investments that were costly will prove to be mistakes of timing rather than judgment,” Mr. Ainslie wrote in his year-end letter dated Jan. 17. Which, of course, is what everyone who throws good money after bad says, hoping for a rebound.
Will 2017 prove to be “different this time” for the hedge fund world in general, and the vaunted Tiger Cubs in particular? Check in in just under 11, soon to be very volatile months for the answer.