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
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)|
Liberty Global PLC C shares
Twenty-First Century Fox
American International Group
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.
“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.