Tourbillon Capital Partners, the $3.7 billion New York hedge fund founded by Jason Karp just reported an impressive third quarter.

When the fund was launched by Jason Karp in 2013, Tourbillon Capital was one of the hottest new fund start-ups, and so far, Karp has not disappointed. In its first year, the fund’s flagship long/short fund produced a return of 21% before going on to add 10% in 2014 and 10.8% last year. However, this year the fund has struggled. The flagship fund fell 12.9% for the year to July but recovered some of its losses in the third quarter.

According to Tourbillon’s third quarter letter, a copy of which has been viewed by ValueWalk the flagship fund added 9.1% net during Q3. The fund reported an 18.8% net return for both is domestic and offshore units vs. the benchmark of 4.4% for a 14.4% positive alpha for the Long Alpha fund.

The Tourbillon Capital TGMF fund had a considerable alpha on the long side of 13.6% (fund return 16.9% and market return of 3.3%) and modest negative alpha on the short side (fund return -7.3% and market return of -3.3% for -4.0% alpha).

Also see

Jason Karp On His Shortselling Process

Q3 2016 Hedge Fund Letters

Tourbillon Capital hedge fund photo
Tourbillon Capital Photo by cafecredit


Tourbillon Capital: Winners and losers 

According to the fund’s letter to investors, some of the biggest losers during the first quarter of the year turned into winners for Tourbillon Capital as the fund held its nerve in volatile markets. The fund notes in its letter that the same scenario unfolded during 2014 and Karp and team borrowed from the 2014 playbook to profit this time around.  

The biggest winners on the long side for the quarter were Medivation Inc (acquired by Pfizer), SunOpta, Inc. (USA), Hewlett Packard Enterprise Co and Green Plains Inc. While the top five losers were Post Holdings Inc and some unnamed shorts.

Tourbillon Capital: Keeping a cool head

With volatility growing, the central theme of Tourbillon’s letter to investors is the need for calm in stormy waters. The team writes:

“It is important not to let your current performance dictate your process. We must continue to remember, no matter how painful, that process trumps outcome over time. Our largest detractor and contributor on the quarter are good examples of this.”

Karp has some humorous words for the current active management environment

After the volatility of Q 1, many funds and active managers still have post-traumatic stress disorder about doing whatever it takes to avoid a quarter like that again. Some things can be learned from 01, but some things cannot, Like the quote above, we believe that any method of investing involves risks. Avoiding danger in an endeavor dominated in the short-term by human emotion – particularly fear, greed and FOMO (fear of missing out) – is indeed impossible. It is also tempting to retreat, neuter one’s process and suffer in a drawdown by avoiding new opportunity when it presents itself. White we did make some improvements after very challenging 01, we did not deviate from our process or our relentless pursuit of finding new investment opportunities. And for those who feared that these improvements would neuter our potential upside going forward, this quarter should alleviate those concerns.

As well as a long-term outlook and steady hand on the tiller, Tourbillon has also engaged in its first activist battle this year. The fund wrote a letter to the board of SunOpta in May when the stock reached an 8-year low of $3.27 per share. Even though sales in the organic food space are growing at a rate of 10% to 15% per annum, compared to 2% for the rest of the market, SunOpta has failed to capitalize on this. Here’s what Tourbillon is calling on SunOpta’s management to do according to a round-up from Barron’s:

“Tourbillon isn’t demanding that the board put the company up for sale; it believes it could increase value by getting SunOpta to: 1) fix operational missteps; 2) refocus sales efforts; and 3) effectively deploy capital. But a sale might be a better alternative, and there is no reason to think management isn’t on the same page as Tourbillon. This could be a good acquisition opportunity for private equity and/or strategic investors, either as a whole or by splitting the sourcing and manufacturing businesses.”

Tourbillon Capital isn’t the only hedge fund betting on changes at the company. In our coverage of hedge funds here at ValueWalk, SunOpta has appeared in a few 13Fs most notably Engaged Capital LLC and West Face Capital LLC both of which have invested more than 16% of assets under management invested in the company.

The final topic in Tourbillon’s letter is a discussion on the subject of how smart devices and the interest are changing the world for the worse. 

The most stunning statistic highlighted is the fact that today, the average attention span is just 8 seconds, down from 12 in 2000, according to a study of brain activity by 2,000 participants by Microsoft in Canada. This attention span is shorter than that of a goldfish, which have an attention span of 9 seconds on average. 

Also of note is the fact that since the first launch, players have spent 25 billion hours (2.85 million years) playing Call of Duty, which is longer than the entirety of human existence (2.2 million years).

Finally, the letter which is dated November 8th seems to predict a Trump victory Karp writes quoting Dilbert creator, Scott Adams:

Today, people of all generations can more easily consume leisure at work, through their smartphones, than any other time in the history of organized work. They can shop, they can Facetime with their kids, they can see what their friends are up to, they can place bets on their sports teams and they can plan their vacations. While most employers think they are paying their employees for 10 hours of labor a day, they are, in fact, only getting 8 or fewer hours of actual labor. Perhaps the lack of rising wages and anemic growth in most sectors is a not function of any true stagnation, but really it is because people have chosen to consume far more leisure during the workday. Regardless of the debate about whether we can get more done in the same amount of time (more productive), all businesses globally, where employees have smartphones, are similar to the way machines operate. If you believe people use reason for the important decisions in life, you will go through life feeling confused and frustrated that others seem to have bad reasoning skills. The reality is that reason is just one of the drivers of our decisions, and often the smallest one.

Karp states after quoting the above:

Perhaps the quote above explains why Trump has a shockingly high chance of winning.

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