Don’t Count Out Tiger Cubs, Says Hedge Fund Analyst

The “Tiger Cub” hedge funds, those protégés of legendary investor Julian Robertson, were down significantly in March, suffering their third worst month of negative alpha in history.  But don’t count them out  says Stanley Altshuller, co-founder and chief research officer at Novus, a hedge fund analytic platform. In fact if history is any guide, investing after a drawdown might be a consideration.

Investing in Tiger Cubs on a drawdown

In an interview Altshuller noted that the Tiger Cubs “have a statistical tendency to deliver above average returns after experiencing negative market conditions.”  What Altshuller appears to be pointing to is the old alternative investing strategy of “investing on a drawdown,” which has been used by aggressive professional investors as a method to time hedge fund investments.

Tiger Cubs March decline due to crowded , illiquid markets and overlapping positions

Tiger Cubs

 

Altshuller explains the March decline in Tiger Cub performance in large part due to crowding by Tiger Cubs into the same major names and then liquidity issues when they began selling in the month.  “Vast amounts of capital driven by AUM growth had been invested in the same stocks fueling illiquidity and concentration,” Novus wrote in a letter to clients. “Many ‘crowded’ names, mostly in tech and biotech companies, showed a clear relationship between Cubs’ ownership and March’s loss. The Cubs seemingly headed for the exits at the same time. The heaviest owned names sold off the most.

Novus noted that the stocks with the highest “Tiger Cub ownership” were hardest hit in March.

# Tiger Cubs Security
21 Facebook Inc (NASDAQ:FB)
21 Priceline Group Inc (NASDAQ:PCLN)
17 Liberty Global plc (NASDAQ:LBTYA)
15 Google Inc (NASDAQ:GOOG)
14 Charter Communications, Inc. (NASDAQ:CHTR)
14 Liberty Global plc – Class C Ordinary Shares (NASDAQ:LBTYK)
14 Twenty-First Century Fox Inc (NASDAQ:FOX)
13 FleetCor Technologies, Inc. (NYSE:FLT)
11 American International Group Inc (NYSE:AIG)
11 Apple Inc. (NASDAQ:AAPL)
11 Baidu Inc (ADR) (NASDAQ:BIDU)
11 Endo International PLC (NASDAQ:ENDP)
11 Visa Inc (NYSE:V)
10 CBS Corporation (NYSE:CBS)
10 Citigroup Inc (NYSE:C)
10 eBay Inc (NASDAQ:EBAY)
10 Time Warner Cable Inc (NYSE:TWC)
10 Valeant Pharmaceuticals Intl Inc (NYSE:VRX)
9 Amazon.com, Inc. (NASDAQ:AMZN)
9 Mastercard Inc (NYSE:MA)

Facebook

Novus Overlap Tiger Cubs Facebook

Chart via Novus Research

 

Priceline.com

Novus Overlap Tiger Cubs Priceline

Chart via Novus Research

 

Liberty Global

Novus Overlap Tiger Cubs liberty Global

Chart via Novus Research

 

Google

Novus Overlap Tiger Cubs Google

Chart via Novus Research

 

Charter Communications

Novus Overlap Tiger Cubs Charter Communications

Chart via Novus Research

 

Liberty Global PLC C shares

Novus Overlap Tiger Cubs liberty Global C Shares

Chart via Novus Research

 

Twenty-First Century Fox

Novus Overlap Tiger Cubs Fox

Chart via Novus Research

 

Fleetcor Technologies

Novus Overlap Tiger Cubs Fleetcor

Chart via Novus Research

 

American International Group

Novus Overlap Tiger Cubs AIG

Chart via Novus Research

 

Apple

Novus Overlap Tiger Cubs apple

Chart via Novus Research

 

Baidu

Novus Overlap Tiger Cubs baidu

Chart via Novus Research

 

Endo International

Novus Overlap Tiger Cubs Endo

Chart via Novus Research

 

Visa

Novus Overlap Tiger Cubs Visa

Chart via Novus Research

 

To Illustrate the point further, Altshuller points to a chart showing stocks with the highest level of ownership among the Tiger Cubs were the hardest hit as the assets under management were unwieldy to manage when the same funds exited the same names at the same time.

Tiger Cubs

“March 2014 was close to a record for negative monthly alpha for these Tiger Cubs,” the client letter said. “Only September 2008 and September 2011 had worse relative performance for Tiger Cubs’ publicly reported longs against the S&P 500.  Perhaps even more interesting, the other outlier negative months were hard declining months for the broader industry, while March was relatively flat for the S&P 500.”

Altshuller notes that many Tiger Cubs had been moving up the ladder to larger cap offerings.  Separate reports indicate that some Tiger Cubs have returned assets to investors as their large asset based becomes more difficult to manage.



About the Author

Mark Melin
Mark Melin is an alternative investment practitioner whose specialty is recognizing a trading program’s strategy and mapping it to a market environment and performance driver. He provides analysis of managed futures investment performance and commentary regarding related managed futures market environment. A portfolio and industry consultant, he was an adjunct instructor in managed futures at Northwestern University / Chicago and has written or edited three books, including High Performance Managed Futures (Wiley 2010) and The Chicago Board of Trade’s Handbook of Futures and Options (McGraw-Hill 2008). Mark was director of the managed futures division at Alaron Trading until they were acquired by Peregrine Financial Group in 2009, where he was a registered associated person (National Futures Association NFA ID#: 0348336). Mark has also worked as a Commodity Trading Advisor himself, trading a short volatility options portfolio across the yield curve, and was an independent consultant to various broker dealers and futures exchanges, including OneChicago, the single stock futures exchange, and the Chicago Board of Trade. He is also Editor, Opalesque Futures Intelligence and Editor, Opalesque Futures Strategies. - Contact: Mmelin(at)valuewalk.com