Tiger Hedge Funds Become Wall Street Prey
Funds managed by disciples of Julian Robertson have fallen on hard times
Famed stock picker Julian Robertson and his protégés have ruled the Wall Street jungle for decades. After a down 2016, their reign is being challenged.
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%.
That compares with a 12% gain for the S&P 500, including dividends.
“We are very disappointed by these results, which fall well short of our aspirations on both an absolute and a relative basis,” Viking wrote in its year-end investor letter dated Jan. 17.
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 posted losses for 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.
“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.
This tactic contrasts with other equities hedge funds that will tactically get into or out of a sector based on a broader view of how an industry will be changed by events like changing regulations or a slowdown in China.
But 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.
Some traders say forces like algorithmic trading and passive investing appeared to drive the market moves. Both have become larger parts of the market in recent years.
Traditional “quants” program their computers to bet on statistical relationships among securities prices. At the same time, passive investments such as exchange-traded funds can cause stocks in a sector to move together, regardless of their underlying characteristics.
That lockstep movement can help funds that invest based on a broader view of the world or political changes but challenges investors whose playbook relies on closely examining a firm’s balance sheet.
“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.”
Mr. 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.
The firm returned client money in 2000 after losses and investor defections.
Tiger has since reinvented itself into a business that backs smaller hedge funds, while Mr. Robertson’s former employees collectively manage more than $100 billion in some of the industry’s biggest funds. They frequently show up in the same trades, a result some of them ascribe to their shared investment philosophy.
In 2016, funds like Charles “Chase” Coleman’s Tiger Global lost money when previously highflying tech stocks declined.
The first six weeks of last year, Amazon.com Inc. and Netflix Inc. dropped 25% and 24% respectively, compared with a 8.5% decline for the S&P 500. Morgan Stanley said a quarter of stock hedge funds by mid-February were down 10% or more.
Tiger Global’s technology-focused hedge fund was down 22% after the first six weeks of the year and ended the year down 15.3%, said people familiar with the firm.
Positions that hurt Tiger Global in the first quarter included Amazon.com, JD.com Inc. and Netflix. The fund had sold out of Netflix, one of its biggest positions, by the end of September and is now running with less concentrated positions, people familiar with the firm said.
Losing health-care bets also hurt Tiger Cubs, with a wager on Valeant Pharmaceuticals International Inc. stinging Lone Pine and Viking. Viking’s other biggest losers for the year included Allergan PLC and Teva Pharmaceutical Industries Ltd., according to its letter.
Since the election, some traders have predicted the environment for stock picking would improve. Mr. Trump’s plan for deficit spending, tough talk on trade and taxes and lighter regulation for banks, pharmaceutical companies and other industries have meant increased volatility. 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.
Coatue, Maverick, Tiger Global and Viking gained in January, said people familiar with the firms, with Tiger Global up 5.5%
Regardless, some of the Cubs are making changes.
Mr. 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, said people familiar with the firm. Lone Pine began collecting data on these issues more systematically last year, one of the people said.
Investors redeemed 10% of their money from Lone Pine last year, a higher percentage than in past years, the people said.
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.