Tourbillon Capital Partners special letter to investors discussing Tourbillon returning capital to investors and winding down.
Text is below and readers can find the full PDF at the bottom – see much more Q3 hedge fund coverage here
Six years ago, when we first established Tourbillon and our main fund, Tourbillon Global Master Fund, Ltd (“TGMF”), we had one primary principle: to isolate and only be compensated for alpha. Back then, and much more so today, beta was readily accessible and almost free to capture, and thus we believed that investors should only pay fees for true measures of skill (alpha) that could not be easily replicated with an index or a few ETFs. Our implementation of this principle took form in a portfolio characterized by very low net exposure, minimal beta, minimal factor tilts, and diversification across sectors and position count.
While our execution of this approach delivered outsized returns over our first three years and our inception to date net returns are double-digit positive, we have recently not delivered the results that you expect of us and what we know we are capable of. We have conducted many thorough analyses of our results, our process and our portfolio construction in order to determine the best path forward for TGMF. Although we believe that we have identified the right industry problem and being paid solely for alpha should remain a guiding principle, we recognize that our solution, in this ever-changing environment, is no longer optimal.
Our portfolio construction succeeded in minimizing the noise of the investment climate, but it also muted the signal arising from our best ideas - a signal we should have been isolating and amplifying. It has been well documented that the best investment managers who manage a diverse portfolio have a batting average of only ~60% (meaning they are still wrong 40% of the time). However, we have seen ample evidence, especially at Tourbillon, that most managers’ ex-ante highest conviction bets have significantly higher probabilities of working than 60% (and much better odds than the rest of their other ideas). We have discussed these findings (e.g., that our top ideas have had ~80% success rates) in some of our letters, and many of you have asked, “Why not just spend all your time on the ideas that are likely to have 80/20 odds with higher returns?” The answer: we believe doing so is incompatible with a traditional hedge fund structure like TGMF because it requires tremendous flexibility around portfolio construction and capital deployment, such that one only invests in the highest conviction opportunities and nothing else.
Given the results of our analysis and these conclusions, and despite managing over $1 billion in AUM with modest redemption indications through year-end, we have determined that TGMF is no longer an optimal way to manage your and our own money. To achieve outsized returns and provide a uniquely superior product, we believe we need to be investing solely in areas where we have strong, distinct advantages with the highest odds of success – and we think TGMF no longer fits that bill. We are truly grateful for the support of all of our partners, but instead of either tweaking TGMF’s approach (which we do not think would achieve the desired results) or drastically altering our fund mandate, we will return investor capital in TGMF at year-end.
We plan on continuing to invest in equities, but we will look to do so in a radically different, unconstrained manner that I believe will allow us to focus only on our highest conviction ideas. Senior members of our team and I will be investing our own capital in this manner, and we look forward to discussing our progress with you further in the future. I want to emphasize that we plan to honor your existing high watermark should we partner again in the future.
Health and Wellness: The Intersection of a Personal and Professional Theme
In addition to broader equity investing, I plan to spend the majority of my time, both professionally and personally, focusing on private and public companies within health and wellness (“H&W”). One of our core theses for TGMF has been the massive and growing theme of H&W, which we have spent considerable time researching. We have done this successfully - long and short - through various stocks, from being long Whole Foods before it was acquired by Amazon to being short many of the “Big Food” companies. Indeed, our current favorite position within this theme – and our only activist situation in 6 years – is SunOpta. H&W is a compelling theme where I see a significant opportunity based on broad misunderstandings, lack of strong competitive dynamics and significant business inefficiencies compared to the hyper-competitive investment industry.
My interest in H&W is also deeply personal. In my early 20s, I became very ill with several autoimmune diseases and was told repeatedly by doctors that, while there was no cure, I should take myriad pharmaceuticals to mitigate my various symptoms. I was also diagnosed with an incurable, degenerative eye disease which impaired my vision and told I would be blind by the age of 30. Despite having achieved superficial measures of “success,” I was sick and very depressed for over a year. After countless hours of research in many fields, self-experimentation, and a naïve refusal to accept these diagnoses, I discovered my diseases were linked primarily to food. Within nine months of dramatically improving my nutrition and lifestyle, all of my ailments reversed, including my “incurable” eye disease.
This harrowing journey instilled in me a life-long passion of focusing on nutrition and how it affects the health and wellness of humanity. As I was forced to scrutinize all aspects of food and the food industry - what was in the food, whether it came from a farm or a profiteering corporation, what kinds of pesticides, engineering and “technology” were used to make it shelf-stable, taste great, and look appealing – I learned there was a huge knowledge gap. Amazingly, I find there is no human activity where there is a greater disconnect between knowledge and frequency of use than eating and human nutrition.
By now, based on global epidemics in diabetes, heart disease and obesity and skyrocketing health care costs, most know that humanity is on this self-inflicted, disturbing trajectory, and yet, we are not acting quickly enough to reverse its course. Poor diet is now the single greatest risk factor for death, chronic disease and disability. Despite all the advances in science and modern medicine, this is the first generation in recorded human history that is predicted to live a shorter lifespan than the previous generation. Based on my own experiences, and as a father of two young children, I am passionately committed to altering how I spend my time within H&W.
In addition to working on growing Hu Kitchen (as in human), a food products company and restaurant that my family launched in 2012 to address the health issues mentioned above, I plan on spending considerable time, investment and philanthropic resources to focus on the broad theme of health and wellness. I believe we are at an inflection point of a food and product revolution as people now recognize that the American approach to diet and disease has failed abysmally. And because of the massive economic consequences of diet and disease, it also represents one of the greatest opportunities for philanthropy, impact investments and productive uses of capital to not only generate significant returns, but also to effect real positive change toward helping humanity get healthier.
Sometimes when you innovate, you make mistakes. It is best to admit them quickly, and get on with improving your other innovations. – Steve Jobs
Over the coming weeks, and by year end, we will be working diligently to unwind the TGMF portfolio in a prudent manner, seeking to maximize value for all investors. You will receive a separate communication detailing the specifics of this process. I am committed to ensuring an effective and orderly liquidation – our interests are aligned as the bulk of my liquid capital is invested in TGMF.
I have truly valued your trust, loyalty and advice over the past six years. Along the way, many of you have become friends and many have generously provided thoughtful and helpful feedback. For the quality of these relationships and for your friendship and guidance, I am deeply and forever grateful. Although this chapter didn’t end the way any of us had hoped or intended, I do hope to have the privilege to work for you again in the next chapters, as we explore the aforementioned “other innovations” that we believe will set us back on the path of excellence. Thank you again for your partnership.
Jason H. Karp
Tourbillon Capital Partners
DISCLAIMER: You are receiving this information because you are an investor in Tourbillon Global Master Fund, Ltd (the “Master Fund”) via Tourbillon Global Equities, Ltd or Tourbillon Global Equities, LLC (collectively the “Funds” and each, a “Fund”). This communication is not an offer or solicitation with respect to the purchase or sale of any security and is intended only for the person or entity to which it has been delivered. Your acceptance of this document from Tourbillon constitutes your agreement to (i) keep confidential all the information contained in this document ("Confidential Information") and not disclose any such Confidential Information to any other person, (ii) not use any of the Confidential Information for any purpose other than to evaluate an initial or continued investment in the Funds, (iii) not use the Confidential Information for purposes of trading any security, (iv) not copy this document without the prior consent of Tourbillon, and (v) promptly return this document and any copies hereof to Tourbillon upon Tourbillon's request. This material is also subject to the confidentiality provisions set forth in any written agreement between the recipient and Tourbillon or the Funds.
Performance presented herein reflects realized and unrealized gains and losses on all investments. Individual investment returns will differ from the returns presented herein due to the differences in timing of contributions, redemptions, fee structures and new issue eligibility. Investors should review their individual statements for their individual returns and the monthly performance reports for the Funds’ YTD returns. Any past or current investments made by Tourbillon or any idea examples described in this letter are presented solely to illustrate Tourbillon’s analysis and thought process. Past performance does not guarantee future results. Tourbillon’s process and view on any specific investment or idea may vary from time to time, and there is no guarantee that Tourbillon’s view on such investment or idea is right. These ideas are not suitable for all investors and should not be relied upon as investment advice for an investor’s own portfolio. Tourbillon’s risk tolerance, holding period and portfolio construction will vary from other investors’. It should not be assumed that any idea presented herein or any of Tourbillon’s future investment ideas have been or will be profitable or will equal the performance of any securities discussed herein. This brief letter does not purport to contain all the relevant information that may be required to make an investment decision and should not be relied upon to make an investment decision in any particular security or in the Funds. Companies referenced herein were not part of the preparation of this letter and therefore have not (and will not) commented on its accuracy. The views presented herein are solely the views of Tourbillon based on its independent research. This letter includes statements that are, or may be deemed to be, “forward-looking statements”, which may be identified by the use of forward-looking terminology, including terms such as “intends”, “will”, “believe”, “view” or similar terminology. Although Tourbillon believes that the expectations and views reflected in any such forward–looking statements or projections are reasonable, such statements are subject to a number of assumptions, risks and uncertainties which may cause actual results, performance or achievements to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements. Tourbillon is under no obligation to update any information or any views reflected in this letter. Forward looking statements should not be used as the basis on which an investment is made.
While all the information prepared herein is believed to be accurate, Tourbillon makes no express warranty as to its completeness or accuracy nor can it accept responsibility for errors appearing herein. Tourbillon is under no obligation to inform the recipient of any revisions or updates to any information contained herein. The information set forth is current as of the date set forth on the first page, and recipients should not assume that there has not been any change in the matters described herein since such date. An investment in the Funds is speculative and involves the risk of loss. No representation or warranty, express or implied, is made as to the accuracy or completeness of the information contained herein, and nothing herein shall be relied upon as a promise or representation as to the future performance of the Funds. Potential investors should not construe the contents of the enclosed materials as legal, tax, investment or other advice. Investors should consult with their own professional advisors as to the legal, tax, financial or other matters relevant to the suitability of an investment in any Funds. The above performance and risk disclosures do not purport to be complete. For a complete description for the risks, terms and conditions please see the relevant offering documents of the Funds.