Hidden Value Stocks issue for the fourth quarter ended December 31, 2022, featuring an interview with Jeffrey Cherkin, Founder & Chief Investment Officer Of Tourlite Capital Management, LP.
Interview With Tourlite Capital’s Jeffrey Cherkin
Could you give us a bit of background on Tourlite and the firm’s history?
First off, thank you for reaching out. We began investing in April 2022. Before launching Tourlite, I spent a year at a value-focused long/short equity fund and then almost three years at Spruce Point focused on short selling.
Q4 2022 hedge fund letters, conferences and more
My goal for Tourlite is to combine these investment frameworks into a traditional long/short strategy to generate returns on both the long and short side. I always envisioned launching my own venture, and I had the opportunity to raise initial capital from a mentor who is a very successful investor.
Tourlite is the first long/short fund to feature in Hidden Value Stocks, so we couldn’t let the interview pass without discussing your approach to shorting.
Can you explain why you decided to set up a long/short fund?
I am honored to be the first long/short fund. In our view, the role of a hedge fund is to capture spread. For a long only fund, it is relative to an alternative investment, commonly an index. For a long/short fund, the spread is between your long and short book.
Therefore, a fund’s short book is fundamental for a successful long/short portfolio and the objective is to capture positive spread between our long and short ideas. In a down market, this should allow us to hedge market risk, reduce volatility, and the ability to redeploy capital to our long book at a lower cost basis. We aim to produce alpha from both long and short ideas.
We run a low net fund, meaning our overall exposure to the market is low. The size of our short book is about the same as our longs. Since inception, our net exposure has been close to zero.
What’s your framework for finding ideas to add to the fund?
On the long side, we are looking for high-quality companies at attractive valuations relative to future cash flows. Sometimes I invest in more opportunistic, special situation type opportunities.
Our framework is to look for businesses with sustainable competitive advantages, strengthening market share, predictable cash flows, and strong return on capital.
A quality and shareholder-friendly management team is very important as well. Poor management teams can always ruin good businesses. Ideally, we look for businesses that we can hold for 2-3 years. We have the flexibility to look at companies across market capitalizations and in less efficient parts of the market.
On the short side, we are looking for the opposite. We like to short businesses where we can identify deteriorating competitive advantages and companies that are over earning. Given my background, I like to look at these with a forensic accounting angle that can be backed up by further fundamental diligence.
We track the origination of all our investments on both the long and short side. This is a great exercise for us and allows us to continue improving our process for idea sourcing.
The majority of ideas are sourced from various internal research methods. In addition to our robust screening system, we source some of our ideas from our large network of investors and industry contacts.
Why do you think this strategy is different from other firms?
If you are good at identifying poor businesses, you can identify attractive ones. My feeling is that it is harder to find good shorts than good longs. For many, it might not feel that way this year, but over the cycle, I believe it to be true.
I believe the combination of my prior experiences offers a differentiating perspective to analyze opportunities. Unlike a lot of hedge funds, we can generate alpha both from the long and the short book. Many interviews have been conducted on “concentrated” long only funds that focus on their best ideas.
I generally agree with this approach, but it adds significant volatility and prevents the use of leverage. Our view is that having a more diversified long portfolio built from many of the same principles combined with a strong short book allows for the use of leverage and, ideally, lower volatility.
We believe this should result in higher risk adjusted returns. Our ideal long book would hold approximately 20 companies.
