Tiger Cubs During Covid-19
How have the descendants of Julian Robertson’s Tiger Management held up during the first quarters of an unprecedented year in world history?
Figures from this report, along with additional analysis on the Tiger Cubs Portfolio, can be viewed on this (free) dashboard:
Periods of volatility are when hedge funds simultaneously face their greatest challenges and biggest opportunities. It’s also an opportunity for a manager to evaluate their response to unpredictable environments. Today, we are checking in with the Tiger Cubs to see how they’re answering the challenges of 2020.
Tiger Cubs are a closely scrutinized group of managers whose lineage traces to Julian Robertson, founder of Tiger Management. In this article, we update our analysis of the Novus Tiger Portfolio—an aggregation of historical public filings representing the legacy of Robertson. Managers within this portfolio are labeled as Cubs, Seeds, or Grand Cubs. Cubs worked directly with Julian Robertson during his investment tenure, Seeds were financially seeded by him, and Grand Cubs have worked directly with either Cubs or Seeds.
Our data source is 13F filings, and thus all analyses consider long positions held as of June 2020.
The Tiger Cubs showed strong performance over 2019 and early 2020, keeping consistent with their long history of outperforming the market. As shown in Figure 1, the aggregate portfolio of the Tiger Cubs suffered over a four-month period beginning in the Fall of 2019 and unsurprisingly worsening during the Covid-related bear market early this year.
However, the Cubs quickly pulled out from this dip after March of 2020. As a result of this incredible rally, the Tiger Portfolio posted a total return of 16.54% and 10.64% in April and May 2020, respectively (Figure 2 in dashboard). Not only have the Tiger Cubs navigated the global pandemic shock with resilience but their recovery has greatly outplaced the market benchmarks.
One could argue that a comparison against the wider hedge fund universe would be more suitable. Novus’ custom benchmarks makes this easy.
Both of these hedge fund benchmarks are curated by Novus, using 13F data. The Novus Hedge Fund Universe (also known as the HFU) is a collection of long-short equity focused funds in the US, and the “Top Managers” version is a subset of those largest managers within the Novus Hedge Fund Universe. While it is evident that everyone’s long book took a dive during the early days of Covid-19, Figure 3 shows how, even compared to fellow funds, the Tiger Cubs suffered less and recovered faster.
Let’s zoom in on the downturn and recovery during H1 2020.
The trough during the spring season for the Tiger Cubs was -15.48%, as compared to -24.95% for the HFU and -27.06% for the Top Managers subset. The Tiger Cubs were returning to positive numbers in May 2020 while other hedge funds were still reporting losses at that point.
To round out our surface-level summary, let’s take a look at how performance compares to the evolution of assets under management (AUM) (see Figure 4). The outset of Covid-19 brought the collective AUM to its lowest point since December 2012, but the huge recovery brought a subsequent local AUM peak in May 2020 (latest), its highest point since January 2018.
Drivers of Performance
We’ll now attempt to uncover the main drivers of performance behind the Tiger Cubs’ recent outperformance. While one might be inclined to believe managers of such a legacy would possess solid instincts in sizing their positions, an analysis using the Novus Framework shows this to be false. In fact, if (on aggregate), managers had committed equal weights to their positions as opposed to their actual distribution, they would have performed no different over the past year and a half (Figure 6).
This is a notable departure from the position sizing prowess demonstrated by Cubs in years past.
If not position sizing acumen, there must be other factors at play that make the Tigers purr. A preliminary look into the security selection gives us a little bit more insight; the figures below split securities into (a) winners and losers and (b) outperformers and underperformers. Winners produce positive returns and losers produce negative returns, while outperformers outperform other securities in their same category and underperformers (you guessed it…) underperform (Figures 7.1, 7.2).
75% of securities in the Tiger Cubs portfolio posted positive numbers, whereas 21% of securities posted negative returns in 2020 (4% no change). As established before, position sizing wasn’t a key driver here, and the natural next consideration is pure security selection.
Taking a look at the top contributors and detractors of the Tiger Cub managers (Figures 8.1, 8.2), it is immediately evident that the top contributors outweigh the negative effect of their top detractors. In the above chart, the green area of the bars represent the proportion of contribution attributed to security selection; the top contributors show large portions being attributed to security selection and the top detractors (save for Luckin Coffee Inc) have comparatively minimal absolute detractions.
Diving deeper into the analysis of security selection, we can bucket securities into categories of market cap and sector to gain more insight into the success of the Tiger Cubs. Considering market cap, even the briefest glance portrays an obvious trend in the types of securities that are most profitable for the Cubs (Figure 9).
In 2020 alone the Tiger Cubs’ securities that fall under the Mega Cap (>50bn) market cap classification had a PnL of over 14 billion dollars, with Large Cap (10bn - 50bn) market cap securities having a PnL of just under 7 billion dollars. The Tiger Cubs show extreme aptitude when it comes to large companies, but find poor returns with smaller market caps, likely due to a greater distribution of capital to these larger market caps.
Another obvious and natural categorization is the classification of security sectors. The Tiger Cubs have found greatest value in the Information Technology, Consumer Discretionary, and Communication Services sectors (Figure 10). These sectors cast large shadows over the other sectors. And while this success is augmented by the sectors’ individual performances in the market, the security selection attribution demonstrated in the earlier section suggests that it was the managers’ security-level skill that drove profits.
See the dashboard for batting average & win-loss ratio information by sector and market cap.
The direction of the market and the world in which it runs continue to be a mystery, which presents challenges for investors and non-investors alike. In times like these, it’s comforting to turn to something familiar. From our visit with the Tiger Cubs today, we conclude that these descendants of Julian Robertson continue to earn their notability among managers in the world of finance.