Manager Monday: Ratan Capital
This week's Manager Monday looks into the public filings of the only female-run tiger cub, Ratan Capital. Learn how they've outperformed.
Exactly one year ago, BloombergBusiness profiled a young hedge fund manager who, seeded by Julian Robertson, currently runs the New York-based Ratan Capital Management. The article claimed that while being a “brilliant stock picker”, Nehal Chopra’s tough managerial style presented challenges with retaining talent. While we are not going to opine on the softer issues of people management, we can respectfully test the first assumption about her investment management acumen. A recent study by Kyria Capital, a firm that invests in women-run hedge funds, found some distinctions between male and female asset managers. Given she is the only female manager in our group of about 50 Tiger Cubs, (Anne Dias Griffin who used to run Robertson-backed Aragon, returned money to clients in 2009) we will also test how different or unique her portfolio is relative to her fellow male Tiger Cubs (and Seeds).
As usual for our Manager Mondays, everything mentioned in this post is sourced exclusively from public data, including the manager’s profile, simulated performance and all other analysis and commentary. The data used here omits the short side, non-equity securities, many non-US securities and all non-public information such as actual fund performance. To simulate performance and determine portfolio attributes such as liquidity, we combine public holdings data with market and pricing data and make simple assumptions.
Since being seeded by Roberston in 2009, Ratan’s assets have grown significantly, especially in the last few years. Some of the growth was due to performance, but that’s only part of the story. Her impressive track record has attracted new capital and Robertson himself increased his allocation.
Our data starts at her first filing with the SEC – December of 2012 (there are AUM thresholds managers must cross to make filing a requirement). We use our standard “Novus lens” to peek under the hood of this manager. Let’s dive in.
Ratan Capital AUM and Concentration Changes
As mentioned, Ratan’s AUM (we use total reported assets as a proxy) has grown considerably since their first filing and now hover around $1 Billion.
In light of this increase in assets, the manager cut position count, effectively focusing her book on a smaller number of stocks and driving up her concentration.
She runs a more concentrated book than most other Tiger Seeds as her top ten securities represent close to 100% of the portfolio.
Many smaller long/short equity and event-driven managers prescribe to the philosophy of keeping their books very concentrated and their analyst teams small. This way, they gain an edge in the few names they are invested in through focused research of the businesses behind the securities instead of spreading their efforts over dozens of positions. “Deworsification” is real. But with a book this concentrated, position sizing becomes just as critical as stock picking. If Ratan’s largest positions perform worse than their smallest positions, they are leaving a lot of money on the table. Novus clients test this with a metric called Position Sizing value add.
Ratan Capital Position Sizing
It seems the decision to move to a more concentrated investment style has been paying off. Since the beginning of 2014 (the period of increased concentration) her sizing decisions have added an impressive 32 percentage point over the equally weighted return (orange line in chart below). This implies that the changes the manager is making are substantial and are having a real positive impact on the bottom line. It also implies that the manager is skilled at expressing conviction. Their largest sized positions outperform smaller sized positions.
The same concept can be seen in the win/loss ratios by position size buckets. As expected from the chart above, Ratan does well in their largest positions.
Win/Loss ratio by position size bucket:
Contribution by position size bucket:
Ratan Capital Scalability and Liquidity
We have seen many managers move up the market capitalization spectrum after rapidly growing assets. Below is the average market capitalization of the stocks in Ratan’s portfolio, weighted by their positions in each name.
Recently, their portfolio has been shifting into Mega Caps and out of Small.
This move has kept liquidity in check and the fund remains very liquid even at their present concentration levels. There does not seem to be any short term issues with scaling the fund further while remaining liquid, but in the future, if growth persists, they might need to think about increasing position count, and as a result potentially growing the analyst team covering new securities, especially if they want to venture out of the Mega Cap space.
Ratan Capital Market Capitalization
The data implies that this move into larger cap names has been warranted. In fact, similar to many of their Tiger Cub peers, their highest return and alpha contribution come from larger capitalization stocks.
Annualized return by Market Cap
Security Selection alpha by Market Cap
Ratan Capital Sectors
From her days at Balyasny, Chopra has been a generalist investor, not focusing on any one or two sectors, rather looking for a “corporate change” in her investments, practicing an event-driven style. However, as of most recent filings it is clear that she has been riding the healthcare boom, currently investing 46% of the portfolio in the sector, down from 77% in January of this year.
According to Novus Framework, our attribution framework that breaks returns into four components, most of the alpha (return above the market and sector returns) has been generated in the Healthcare sector since the start of the analyzable period. In addition, some alpha has been generated in Consumer Discretionary and IT, while it was lost in Staples (currently 18% of the book). Again, this is typical of hedge funds in general, as Staples is commonly a zero or a negative alpha sector. The article we referenced earlier in the post refers to Chopra as a brilliant stock picker. This seems to only be true in the Healthcare sector according to data. Let’s take a closer look at the actual names.
Ratan Capital Overlap
It is interesting to look at the names that Ratan shares with their Tiger Cub peers. Below is a screen shot of the overlap matrix:
If you click on Uniqueness, the matrix will sort managers from the most unique to the least unique. Uniqueness is calculated within the context of this group of Tiger Cubs, so in the case of Ratan, they fall in the middle of the pack at 17.7% uniqueness. That’s the portion of their portfolio that is unique only to them and no other Tiger Cub owns those names. In the table to the right of the matrix, the unique names are bold. You can quickly see that the two largest positions in their portfolio are very commonly held stocks Valeant and Allergan at 10 and 20 cubs, respectively. Thus, most of the stock picking alpha in Healthcare was actually due to a few very popular Tiger Cub stocks. Here are their top contributors since 2012.
Is Ratan Capital a Leader or Follower?
A team in our product group headed up by Adam Benenson is building a pioneering analysis to rank all managers based on their ability to be early and right on a stock or to “lead the pack” in conviction trades. For instance, it’s interesting that Ratan has benefited from Valeant but were they among the first in that name or simply caught on after others had invested? Analyzing this only within the context of the Tiger Cubs we can see that Ratan was among the first investors in VRX, the third to be exact, behind Hound and Marble Arch who were leaders. You can see that of the managers that followed suit, many had much lower position sizes (lower conviction) and thus did not benefit as much as the leaders.
Ratan Capital’s investment in Valeant: Price vs. Position size
From the chart above we can see how Ratan managed the position size of VRX and increased their bets and trimmed at just the right times.
Ratan Capital’s Similarity to Adi Capital
Some investors expressed concern over the fact that Chopra’s husband, Paritosh Gupta also runs an event driven fund (smaller than Ratan) called Adi Capital Management. A filing with the SEC states that “Mr. Gupta and his spouse do not discuss any information related to their funds’ current investments, potential investments, investment strategies or other confidential investment-related information.”
We ran a simple overlap analysis on the two funds and found two names in common:
While the position count of the overlapping securities certainly is low (2), the portfolios overlap significantly in percent of market value. This means that both managers have high conviction in the two names they share. Roughly 17% of Ratan’s portfolio is owned by Adi and 26% of Adi’s is owned by Ratan. If you were to pull two hedge funds at random their average expected overlap to each other is 4-6% according to our latest industry overlap analysis.
No doubt, Ratan Capital is a successful Tiger seed with potential and is proving their worth with great numbers. However, it would be wise for investors to understand the source and uniqueness of the alpha in their returns. While the stock picking is indeed excellent in Healthcare in particular, the stocks are by no means unique in the scope of their peers. However, data points to Ratan being leaders in at least some of the popular names, and their ability to properly size those names and monetize their conviction is surely responsible for a large chunk of their success.