How are Julian Robertson's protégés faring among the volatility of the past year? Novus tools uncover what's working for Tiger Cubs today.
“We aren’t that worried about the market, the reason being that everybody else is worried about it.”
These are words spoken by Julian Robertson nearly thirty years ago in the golden age of Tiger Management, and they remain words to live by for many hedge funds in 2019, as markets ended Q1 on a high. When the worst December since the Great Depression is followed by the best first quarter for the S&P 500 since 1998, it begs the question, how can hedge funds adjust to stay ahead of the curve in increasingly unpredictable times?
To find out what strategies might be working in the industry today, it’s worth checking in with Julian Robertson’s legacy. In this article, we’ll dive into our Novus Tiger Portfolio, a carefully curated aggregation of historical public filings tracking the progeny of Julian Robertson. These are managers that either directly worked with Mr. Robertson (Cubs), managers seeded by him (Seeds), or those who have worked with either the former or the latter (Grand Cubs). We colloquially refer to all three as “Tiger Cubs” in this article.
Tiger Cubs outperformed the market for the majority of 2018, falling short only in the 4th quarter (and only by a hair), after which they bounced back into a strong lead.
Assets under management (AUM) for Tiger Cubs hit a 5-year low in December 2018, down 29% since 2013 and 13% since 2017. Recall that AUM for this portfolio is proxied by the total market value of all the long names in the book. Recent filings show AUM may be creeping up again after a strong Q1, but we’ll have to wait until August to see how this trend plays out.
In the past, we’ve explored how Tiger Cubs have reacted when AUM increases. We know that these managers tend to size up their top positions, move up the market cap spectrum, and lean towards a significant IT exposure.
Given that these types of portfolio management decisions can dramatically affect manager returns, let’s take a look at how fluctuating AUM impacted Tiger Cub performance in what was undeniably a difficult year for hedge funds.
Position Sizing and Conviction
Figure 3 shows that as the number of positions have increased in the last three years, so has the exposure to the top names in the book.
Position size analysis shows that the portfolio’s exposure to different sizing buckets has changed over time. Figure 4 shows us how (for example) the 3.5% – 5.0% bucket increased from 7% at the beginning of the year to nearly 13% at the end of the year, reaching a peak of nearly 16% in January before shrinking back.
Novus analysis reveals that the Tiger Cubs demonstrated collective position sizing skill during 2018, enabling them to add true value—compared against an equally weighted portfolio—for the entirety of the year.
Consistent Bets with Market Cap
As we discussed in 2017, a significant chunk of portfolio alpha was generated as a result of Tiger Cubs moving up the market cap spectrum. Maintaining exposure to large and mega cap names proved to be a good choice again in 2018.
Batting Average refers to the number of winners in a portfolio as a proportion to the total number of positions in the bucket. We can see from Figure 6 that mega and large cap securities had the most winners among them, but this isn’t necessarily a measure of impact on the portfolio. Batting Average measures how often a manager is right, but it’s the Win/Loss Ratio that measures how right the manager is when they’re right versus how wrong they are when they’re wrong.
Figure 7 shows us that the winning names in the mega cap bucket drove returns for the portfolio, as indicated by a Win/Loss Ratio of >1, validating the Tiger Cubs’ decisions to remain on the higher end on the market cap spectrum.
Now let’s take this a step further and see which names drove alpha generation in the portfolio.
Tigers and Tech
The chart below presents the top winning and losing names from the latest public filings:
We see that the winners are heavy IT mega-cap names, consistent with what we have seen in the past.
No clear trends seem to emerge from the losing names, but it is worth noting that the portfolio has very little exposure to these names—implying that the subsequent detraction was not very impactful on returns. Inversely, the winning names have consistently featured as the portfolio’s top holdings; i.e., the positions that have been sized up by the underlying managers at the aggregate level.
We can now begin to understand the Q4 2018 drop in context. The next chart shows the (negative) contribution that each of the top positions in the book added to the portfolio in the last quarter:
A Deeper Look
As discussed last year, heavy exposure to the IT sector was a major cause of alpha detraction in 2018 for hedge funds, and these managers seem to be falling prey to the same phenomena today. The Tiger Cubs maintained conviction in the sector in Q4 2018, as well as Q1 2019. This decision contrasted with the Novus Conviction Index, which tracks stocks managers “show conviction in” by sizing them up in their portfolios.
One last topic that deserves mention is crowdedness. As we’ve previously discussed, shared lineage often means that Tiger Cubs experience significant overlap in their portfolios.
Consider Coatue Management and Tiger Global as a quick example. The two funds had similar performance in 2018, and ended the year 3-4% lower than the S&P 500. Overlap analysis for these two managers renders many of the names from the previous section. With 33.5% overlap between these two, we get a sense for how top positions are truly shaping their portfolios:
Overall, the traits that characterized these managers in the past hold true today. Circling back now to our opening query, what’s working and what isn’t, a few common themes emerge. Holding crowded names may have proven costly in Q4 2018, but at the same time, maintaining conviction in tech stocks has enabled Cubs to outperform in the New Year. Considering their ability to generate alpha through position sizing acumen, it is no surprise that these hedge funds continue to maintain their rank and reputation among the managers at the top of the food chain.Published on July 1, 2019