As we announced yesterday, Whitney Tilson appeared to be winding down T2 Partners. Whitney Tilson has just released a letter where he discusses the decision. No reason is given for the split up with Tilson and his long time partner, Glenn Tongue. Tilson also sold large positions of his, including Netflix, Berkshire, JC Penny as part of the wind-down process.
Excerpts from the letter and the full letter are attached below:
We are writing to let you know that, after careful consideration, we have decided to cease managing money together and will instead do so independently, in the firm belief that in doing so our investors will benefit over time.
The friendship and admiration we have for each other is unchanged, we will continue operating our funds, and you do not need to do anything. We are, however, modifying our structure: Whitney will become the sole principal of T2 Partners and its three primary hedge funds. Glenn will be establishing a new investment firm, Deerhaven Capital Management, that will independently manage the T2 SPAC Fund, which will be renamed the Deerhaven Fund and become his hedge fund vehicle. We will each have meaningful economic interests in our respective funds, so our interests are very much aligned.
And here is an excerpt from my June letter:
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I’m pleased to tell you that there has been a smooth transition, as discussed in our last letter to you on June 22nd (attached in Appendix A)
When Glenn and I decided to separate last month, I decided to sell most of our stocks – as a small firm, it was easy to exit positions like Berkshire Hathaway, Goldman Sachs, J.C. Penney, AIG, Netflix, etc. – and raise the fund’s cash position to nearly 70% (it would have been higher but for the frictional costs of trading less-liquid positions). I did this for two reasons. First, when there’s a change in the fund’s management structure, it’s only fair to give investors the right to redeem, and we couldn’t predict how many would actually do so.
Secondly, even if there had been no redemptions (and I knew this would be the case in advance), I would have acted similarly because, as I resume the role of sole portfolio manager, it’s critical that I rebuild the portfolio from scratch and truly “own” the ideas. Over the years I’ve avidly studied investor psychology and appreciate the many powerful biases that can lead to emotional decision making, so I didn’t want to inherit the fund’s positions, even though I was comfortable with them. Instead, I wanted to start with a 0% position in each stock and then decide, after a fresh analysis and careful weighing of other available opportunities, whether, when, and how much to buy back (or re-short). So, for example, while it may seem counter-intuitive to have sold my favorite stock, Berkshire Hathaway, only to repurchase it again last week, I was important that I do so.
Rebuilding the Portfolio
I am currently going through a rigorous process with each position. Berkshire was easy – it’s safe, cheap, growing nicely, and I know it well, having owned it for well over a decade, but certain other positions are going to require further analysis before I make an investment decision.
Since the beginning of July, I have begun putting the fund’s cash back to work in what I believe to be exceptionally attractive investments. It has been a productive period as I picked some low-hanging fruit, and the fund is now over 50% invested on the long side and more than 20% on the short side. I will invest more slowly in the coming months as I carefully and deliberately rebuild the portfolio toward my approximate target of 100% long and 40% short.
I am very enthusiastic about the target-rich environment I’m seeing on both the long and short sides right now, and am hoping for continued market dislocation and volatility so that I can invest at even better prices. In light of the weak economy in the U.S., the ongoing sovereign debt crisis in Europe (which I am currently seeing in person at a European value investing conference in Italy, followed by a short stay in Germany on the way home), and the possibility of big problems in both China and Japan, I think it’s a good time to have a lot of cash and be very patient in putting it to work.
