The Tiger in winter
He was old school, scoffed younger rivals. He didn’t get investing’s New Paradigm: buying tech companies founded on the vaguest of ideas and with the dimmest of profit prospects and watching the stocks soar like Roman candles.
He was old school, scoffed younger rivals. He didn’t get investing’s New Paradigm: buying tech companies founded on the vaguest of ideas and with the dimmest of profit prospects and watching the stocks soar like Roman candles.
It was early in 2000, and for more than a year, Julian Robertson had refused to waver in his conviction that the delirious run-up in Internet, telecommunications and technology stocks had no basis in reality and was doomed to collapse. And he issued warning after dire warning.
But amid the tech-stock surge, his old-fangled Tiger Management hedge funds had declined about 40 percent since the end of 1997, and total assets had shrunk roughly 70 percent since late the following year. Rumors were rampant that he was liquidating positions. So on March 30, 2000, the person who many would argue was the greatest investor of his generation closed his $6.5 billion in hedge funds and returned most of the money to his remaining investors.
Of course, Robertson, like the similarly ignored Cassandra, was dead right. As it happened, he shuttered his funds a matter of weeks after the Nasdaq composite index peaked in what would turn out to be the greatest stock market bubble of the 20th century. As of late November of this year, the Nasdaq had plummeted 71 percent and the Standard & Poor’s 500 index had dropped 39 percent from March 2000, despite the erratic recent rallies. Most of the Internet, telecom and tech companies that Robertson’s investors clamored for him to hold (instead of short) have shed almost all their value or gone out of business altogether. Meanwhile, many of the unglamorous value stocks he championed have borne up relatively well.
“We’ve had some great shorts,” Robertson confides. “The balanced approach to investing, where you own the best companies and short the worst, has done exceptionally the past several years.”
Here’s to you, Mr. Robertson. Now 70, Julian Robertson, who invests only for himself these days, is paying more attention to his philanthropies and logging plenty of R&R time at his newly built home at Kauri Cliffs, his spectacular lodge and golf course overlooking the Pacific Ocean on New Zealand’s North Island; he spends several months there each year. He has no regrets about bailing out of the daily and often nightly grind of managing clients’ money (see interview, below).
“I just had a fine stress test this morning,” said Robertson in September. “It is so much more fun and less stressful running your own money and not everyone else’s.”
If Robertson was an extraordinary manager of other people’s money -- despite the dramatic drop in the later years, his flagship fund compounded at 31.5 percent per year (gross) between 1980 and 2000 -- he was also a great teacher of the investing craft. A generation of Tiger Management’s analysts and portfolio managers have gone on to become celebrated hedge fund managers in their own right, like Lee Ainslie III of Maverick Capital, Stephen Mandel Jr. of Lone Pine Capital and John Griffin of Blue Ridge Capital.
Robertson didn’t bow out completely. Since he stopped managing outside money himself, he has continued to operate Tiger Management. Functioning as a kind of portfolio manager paterfamilias, Robertson has raised a pack of young, eager fund managers who preside over such Tiger spin-offs as Tiger Technology (which mainly shorts technology stocks), Tiger Shark Management (long-short equity) and Tiger Asia (Asian stocks, emphasizing South Korea).
“Julian is revitalized from running a consortium of young people,” says Byron Wien, senior investment strategist for Morgan Stanley and a friend of Robertson’s.
The six Tiger managers -- Chase Coleman, Thomas Facciola, Bill Hwang, J. Kevin Kenny Jr., Patrick McCormack and Michael Sears -- have created track records of their own. But they operate out of Tiger Management’s posh Park Avenue offices, drawing on the firm’s infrastructure -- its traders, its administrative services and its CFO, Steve Olson. Most important, the cubs benefit from the Tiger brand and the personal imprimatur of Robertson, with the access it affords to the master’s former investors and contacts.
“My returns are inherently better by being here,” says Kenny, who runs the Emerging Sovereign Group. “I have access to Julian, to a more sophisticated investor base, and instead of getting the 50th phone call from a 22-year-old, I get one of the first and best because of who I am associated with.”
The cubs run a slice of Robertson’s wealth -- Forbes magazine estimates the former billionaire is now worth $760 million -- as well as their own money and accept outside investors. (The exception is consumer-company specialist McCormack of Tiger Consumer Partners, who plans to begin taking on outside money in January.) The cubs get to keep most of their 1.5 percent management and 20 percent performance fees. In return, Robertson owns a small piece of their funds; they own the rest.
But the cubs don’t answer to Robertson and don’t have to take his advice. He, meanwhile, relishes being surrounded by bright young investors churning out a constant flow of well-researched ideas.
“It is a great deal for both sides -- I like to get their ideas and use them for my portfolio,” Robertson says.
The cubs were, for the most part, either managing Robertson’s personal assets or working under contract on Tiger funds when he closed shop. Kenny joined up shortly after the funds were shut down, but Robertson had been preparing to hire him.
“Julian and I said at the time, ‘It’s silly,’” says Tiger’s chief operating officer, psychiatrist Aaron Stern. “‘They’re here. Let’s send them money, provide support services, legal costs and travel costs.’” Stern, who for years has sent prospective employees for psychological tests, has been a combination COO and confidant to Robertson.
Most of the cubs are in their 20s or 30s. And all have the preferred Tiger traits, Robertson says: They’re smart, aggressive and athletic. Robertson seeks out jocks because he thinks their competitiveness helps them excel as investors.
And as investors, the cubs appear to be Olympic caliber. Although Tiger won’t disclose performance data, in keeping with securities laws, sources familiar with the firm report that Coleman’s Tiger Tech fund was up 52 percent in 2001 and is ahead a further 20 percent or so through late November. Hwang’s Asia-geared fund was up 70 percent last year but is down 2 percent this year. The comparable returns for Facciola’s Tiger Shark fund are 38 percent in 2001 and about 3.8 percent this year; for McCormack’s fund, 20 percent and 7 percent. Kenny’s emerging-markets-debt fund, which got going only in April 2002, is up about 5 percent.
The cubs in turn know how fortunate they are to be within the Robertson realm. “Here I get the best of both worlds,” says Kenny. “We own our own business and leverage off our association with Tiger.” As a top-notch emerging-markets trader for Morgan Stanley, Kenny was approached separately by two long-short hedge funds trying to expand to emerging-markets bond activities. But, unlike Tiger, they didn’t offer him the chance to be an owner or to develop a track record under his own name.
Each week Robertson calls a meeting with portfolio managers and analysts. It’s voluntary, but most attend. They bat ideas around. Sometimes Robertson brings in guest speakers, including other hedge fund managers. One recent visitor was Morgan Stanley chief economist Stephen Roach, who delivered a glum forecast.
Outside of meetings, Robertson regularly acts as a sounding board for the cubs. “I bounce ideas off him and hear what he’s pondering,” says Kenny. Robertson and Tiger Tech’s Coleman speak nearly every day.
The rarefied Robertson Rolodex is, of course, a huge boon to the cubs as fledgling managers, perhaps their greatest investment tool. The Tiger founder introduces them to many of his former clients, who tend to be not only rich but also quite knowledgeable about investing. “They are not your average hedge fund investors,” says Kenny. Adds Facciola, a native of blue-collar Staten Island, “I didn’t have any contacts among high-net-worth individuals.”
Being associated with Robertson also gives the cubs credibility on Wall Street. “If we ran $200 million on our own, we would be ranked 40th to 50th in terms of respect on Wall Street,” concedes Kenny. “Instead of a 22-year-old, we get the head of Asian research coming to see us. We have access to resources, information and liquidity we would not get if we were on our own.” Adds McCormack, “If I ran Pat McCormack Asset Management, the likelihood of having a one-and-a-half-hour meeting with Carmax [the Glen Allen, Virginiabased used-car retailer, a recent investment] is much less.”
The benefits are reciprocal. Robertson is smack in the middle of the idea flow. For example, he’s bullish on refineries because he sits in the office adjacent to Michael Hodge, a five-year Tiger veteran whom Robertson calls his “alter ego” and whose research has convinced him that the industry is poised for recovery.
“I’m not an expert” on refineries, Robertson acknowledges. But he has been persuaded that “over time, these companies will do very well. It’s a good business.”
One cub goes so far as to speculate that “getting rid of the funds made Julian a better investor -- his patience can dictate his success.” Robertson’s deceptively simple approach, however, hasn’t changed one whit: Buy the best companies, and short the worst ones. “If you follow that,” he declares, “you could do pretty well, or you should be in a different business.”
These days Robertson is working hard at not being a workaholic. In early October he traipsed through Ireland and continental Europe for two weeks, and he is preparing to leave for New Zealand, where he plans to spend several months (it’s summer there). An honorary Kiwi at this point, Robertson has been visiting New Zealand since 1978 and considers it his second home. He calls it “one of the most beautiful places on earth.” Golf Digest named the course he built, Kauri Cliffs, the best new international golf course of 2001.
A 20-handicap player, Robertson is planning a second course in Cape Kidnapper, about 500 miles away. And he recently bought a vineyard in Hawkes Bay that produces chardonnay, sauvignon blanc and cabernet sauvignon. Is he a wine lover? “Not really,” says Robertson. “This is a business venture. I’m trying to get it running and get the brand established in Europe and the U.S.”
But if Robertson is now free to take long vacations, he’s quick to emphasize that this “doesn’t mean I’m not in touch -- I mix in a little business.”
At home he’s devoting more time and money to an activity that has long been vital to him: philanthropy. Robertson’s principal charitable endeavor, Tiger Foundation, was established in 1990 and seeks to alleviate poverty in New York City (and also to promote philanthropy by Tiger portfolio managers). Grants to date total more than $40 million; grantees this year include the Harlem Educational Activities Fund, the Henry Street Settlement and CityKids Foundation. In the same spirit, Robertson has plans to team up with financier Eli Broad’s Broad Foundation to commission consulting firm McKinsey & Co. to study how to improve New York’s beleaguered school system.
In 2000 he established the Robertson Scholars Program, which allows 30 outstanding high school graduates each year to study simultaneously at the University of North Carolina -- Robertson’s alma mater -- and Duke University. Students get free tuition and board plus cost-of-living stipends and laptop computers. “It’s the only scholarship of its type,” he says. “It’s an opportunity to study at one of the top five private colleges and one of the top five state colleges” -- which also, of course, happen to be archrivals in sports.
Robertson is starting a new charitable organization, to be called the Robertson Foundation, which he and his three sons will control directly. (Tiger Foundation is run by a manager and overseen by trustees.) His vision is to make timely, targeted donations for maximum impact, whether to fund educational projects or to seed good medical opportunities, particularly in cancer research. Robertson’s wife, Josie, developed breast cancer four years ago. Robertson sees the foundation serving as an “instant” source of money if “some scientist needs cash to complete a study.”
He would also like to fund an effort to foster spirituality across all denominations. “After 9/11 it could have happened,” laments Robertson, noting that attendance at churches and synagogues surged following the attacks. “But then everyone dropped the ball.” He says he wants to “conduct a survey to find out what sells at successful religious institutions and what doesn’t. One thing I know: Music sells. Also, informality.”
In 1998 Robertson donated $25 million to Lincoln Center. Of that sum, $10 million was earmarked to create the Josie Robertson Fund to support artistic programs. Robertson says he wanted to surprise his wife, in whose honor Lincoln Center renamed its plaza.
In all, Robertson is said to have devoted about $500 million of his fortune to philanthropy over two decades, though a spokesman wouldn’t confirm that number. And he has encouraged his cubs to be generous as well. “He trained them to be great philanthropists,” says David Saunders, a former Tiger Management trader.
ROBERTSON FIRST BEGAN TO CONTEMPLATE shutting down or at least scaling back his fund operation in 1998, when he and Josie learned of her breast cancer. “That changed things,” recalls one former Tiger. Adds Morgan Stanley’s Wien: “A person who starts and runs a hedge fund has a feeling of immortality. When something challenges that immortality, it forces you to rethink the business plan.”
That same year Tiger was rocked by the Russian debt crisis and a bad call on the yen, and it was soon stubbornly betting against the Internet phenomenon as the bubble sucked in seemingly all but Robertson and a handful of other value managers. Robertson’s funds finished the year down only a few percentage points, but in 1999 they lost nearly 20 percent.
Around August of that year, Robertson approached former Tiger manager Lee Ainslie about merging Dallas-based Maverick Capital with Tiger. “Lee’s a darn good man,” says Robertson. “I thought that might be a good way for me to move on. And he would get bigger in size.” The deal never came off. Robertson won’t elaborate, but a former Tiger cub says the combination didn’t make sense: Tiger was so huge ($23 billion in assets at its peak, in 1998) compared with Maverick ($4 billion) that a deal would have diluted Maverick’s assets and returns.
Robertson, meanwhile, was feeling the strain of running a huge organization during trying times. He had created a hub-and-spoke system in which analysts fed him ideas and he alone pulled the trigger to authorize investments. Pressure was mounting for him to decentralize. Many key people had left to start their own firms in the late 1990s, including Stephen Mandel and Viking Capital’s O. Andreas Halvorsen.
“If he’d stayed in business, he would have transformed it to a little more decentralization,” speculates W. Gillespie Caffray, formerly Tiger’s head trader and now a principal at FrontPoint Partners.
As Tiger’s performance continued to suffer in early 2000, more and more investors yanked out their capital, forcing Robertson to liquidate more investments, and putting further pressure on his overall returns. “It was like a run on the bank,” says one former cub. Robertson next found that he had to worry about portfolio managers and analysts defecting because of his funds’ so-called high-water marks; these stipulate that hedge funds -- and thus their managers -- can’t earn their accustomed share of the gains until the funds recoup their losses. More key people began to depart.
Robertson was also finding the quotidian demands of running a large business -- Tiger at one time had 220 employees -- to be more and more of a burden. Asked what he misses least about running the old Tiger, Robertson singles out bureaucratic and managerial tasks, such as having to fire people and determine analysts’ bonuses. “I don’t think anybody likes that collective-bargaining thing,” he says with a shrug.
One former cub recalls that when he joined Tiger in the 1980s, he admired how Robertson rarely worked on Fridays and took plenty of time off to spend with his family at their home in the Hamptons. “He had a good lifestyle,” the former cub remembers. But as the fund and the company grew larger in the 1990s, he says, Robertson “started working like a dog.”
The top Tiger’s problems were made far worse during the tech bubble by the impatience of his limited partners. Many simply gave up on him and pulled their money out. “His only despair was that longtime partners were losing confidence,” says a person who knows Robertson well. “People did not stick with him.”
Robertson characterizes today’s decidedly unbubblelike investment environment as “a very good period for hedge funds.” The best stocks are holding their own, he says, while the worst are collapsing, and there’s no mania. “By and large, any true hedge fund should have done well through all of this,” Robertson insists. “The only thing I regret is that my partners missed out on such a fabulous period.”
‘A house of cards’ Tiger Management’s Julian Robertson compiled one of the greatest investment records of modern times -- gaining more than 30 percent a year on average for two decades -- only to be caught out by the technology stock mania. His stubborn, though ultimately prescient, conviction was that it was no more than a classic market bubble. But before that insight could be borne out, sharp market reverses led him to fold his tent and close his funds. Now officially retired but still active as an investor and philanthropist and a mentor to a new generation of Tiger portfolio managers, Robertson, 70, spoke with Institutional Investor Contributing Editor Stephen Taub about why he’s afraid for the U.S. economy, which stocks he likes for a rainy day (or decade) and how Federal Reserve Board chairman Alan Greenspan helped inflate the stock market bubble.
Institutional Investor: Who do you blame for the bubble?
Robertson: Everybody was a part of it. Everybody saw marvelous things that changed their lives. They said they were equivalent to the telephone, and they equated them with riches. So they barreled into those stocks. But as Warren Buffett said, when a new industry starts -- radio, cars, aircraft -- very few companies last. When you are a value investor like I am, you realize it’s like Las Vegas.
But was anyone more to blame than most?
Mr. Greenspan. He and all the other politicians and Fed chiefs. Their objective was: “Let’s not let anything bad happen on my watch.” They were not letting normal business corrections happen, setting us up for a doozy.
Setting us up?
Our parents told us to save money, to not borrow money. In essence, Greenspan and government policies discouraged savings. There’s a tax on savings, but a tax deduction for borrowing. So the government encouraged spending, spending, spending. They encouraged borrowing, borrowing, borrowing. Refinance your house!
What about the situation today?
This can’t go on forever. The little guy is doing it, but now he can’t spend any more. He’s tapped out, so the economy will collapse like a house of cards. It will fall when the little guy can’t make the monthly payment on his mortgage. Then it’s all she wrote.
What’s going to happen?
In the next year or so, we’re coming into a very long-term problem, which could equate to Japan’s problems in the 1990s.
As bad as Japan’s?
Worse than that. The one thing that the Japanese had going for them was savings. We [Americans] don’t, so we’re set up for a very tough time for a long period of time. The world is in a position of overcapacity. The Chinese can produce goods at fractions of what others can. There is a disintermediation between our standard of living and theirs.
How do we get out of this mess?
I don’t know how to get out of it. It could be a rough ten-year period for us. I see no way of getting out of it.
Could we see deflation?
Very definitely. That’s worse than inflation. In a deflationary environment, people are put out of work.
What should ordinary investors do?
They should gravitate to very conservative investments. You have to have a conservative, diversified portfolio -- a larger percentage of bonds than normal.
But aren’t bond rates awfully low?
It’s not much of a return, but it’s better than a loss.
What about avoiding stocks altogether?
You can’t be totally dogmatic. You should have a number of common stocks. People forget that their home is their equity. It’s heavily leveraged. They shouldn’t forget that in their equity picture.
Should people get rid of debt?
I would. Most people are paying more than they will get in return.
Suppose the U.S. does have deflation. What should investors do?
There is an increase in purchasing power, so your bond returns are actually very good. If, for example, there is 10 percent deflation, your dollars buy 10 percent more than when you put your money in.
What should pension funds be doing now?
They should be changing their mix to boost fixed income and cutting back somewhat on their equity exposure.
What about wealthy investors?
Those who can afford it should invest in well-run hedge funds that can manage money effectively in any type of market -- but only true hedge funds that short stocks. Ninety-five percent of money managers can’t even go short. So they must fight with their right hands tied behind their backs. It’s an impossible task. As a short investor, I’m actually sort of shocked by the totally unanimity of bearishness today -- it’s the most bullish thing I can think of.
You won’t discuss shorts, but are there any stocks that you like as longs?
I like stocks with very big free cash flow yields. JetBlue is an exception. It’s an airline whose cost advantage is so superior that it can hardly help but do terribly well while 80 percent of the others go broke. There are some wonderfully attractive Korean stocks. There’s Kookmin Bank, a large bank, and Shinsegae, a Wal-Mart type of company. I’m also very fond of an Indian software company, Infosys. It’s a tremendous company in the software field that is reasonably valued and has tremendous growth -- and will continue to have strong growth. I also like the refining industry.
What do you think of the Securities and Exchange Commission’s plans to regulate hedge funds?
That’s fine. There are probably a lot of them that deserve a lot of regulation. Like any other successful, growing industry, it attracts all sorts of different people. Certain rotten apples need to be weeded out. I don’t see why hedge funds should be exempt.
Do you sense that there are more corporate scandals in the U.S. than in the past, or have they just been getting more coverage?
Scandals have gotten much more attention than before. I can’t tell you the number of bright young people here at Tiger who said over the years that General Electric has the most flagrantly aggressive accounting they have ever seen. Nobody cared for years. Suppose you are the chairman of GE. You have employees to think of, shareholders to think of, and Wall Street doesn’t care. So as long as it is on the level, why don’t you do aggressive accounting?
Are you defending the companies that got embroiled in accounting scandals?
Enron, Tyco and WorldCom broke the law. I’m defending executives of firms with aggressive accounting that stayed within the law. They did the best thing for their shareholders and employees.
Are you a better investor for having lived through the bubble?
No, not really. We had a really good record and team here. I can’t let one little period overshadow that. I’m not as good an investor now. I’m not working as hard and don’t have quite the courage I once had.
You’re devoting more time to philanthropy. What do you want to be best known for?
I like to utilize money in a fashion to leverage it to do good. Sometimes political opportunities come up; sometimes opportunities can get a lot of help from outside resources.
Do you plan to give away the bulk of your fortune eventually?
Yes, to the family foundation.
Do you ever regret that you decided to close down your funds?
I really don’t. I can’t do this forever. I’m not on the phone for an hour early in the morning from New Zealand [his second home]. I just couldn’t wake up at age 95 worrying about my partners’ money. I love my life so much now. In hindsight, I might have been better off closing two years earlier.
Tiger Tech Julian Robertson was one of the premier hedge fund managers of his generation. Yet the Tiger Management founder may well be remembered best for having taught his investing tricks to analysts who went on to become acclaimed hedge fund managers in their own right. ExTiger trader David Saunders, a fund-of-hedge-funds manager at K2 Advisors, estimates that former Tiger “cubs” now oversee at least $35 billion. What follows is a look at some distinguished Tiger alumni from a number of classes.
First, though, a group portrait: Maverick Capital’s Lee Ainslie III (who was at Tiger from 1990 through 1993) runs about $7.5 billion; Lone Pine Capital’s Stephen Mandel Jr. (1990'97) manages more than $4 billion; Viking Capital’s O. Andreas Halvorsen (1992'99), Brian Olson (1995'99) and David Ott (1995'99) manage more than $3.5 billion; Blue Ridge Capital’s John Griffin (1987'96) and Joho Capital’s Robert Karr (1993'96) each handle nearly $2 billion; Deerfield Management’s Arnold Snider (1988'93) oversees about $1.7 billion; Intrepid Capital’s Steven Shapiro (1994'97) runs $1.2 billion; K2’s Saunders runs about $1 billion. Among the newer graduates of Tiger Tech, Tudor Investment Corp.'s Dwight Anderson (1994'99) has pulled in $160 million since February 2000, and Shumway Capital Partners’ Christopher Shumway (1992'99) has amassed $150 million since just April.
The honor roll continues. Tiger’s exchief operating officer Philip Duff (19982000) and former head trader W. Gillespie Caffray (19932000) head up $800 million FrontPoint Partners, a multistrategy hedge fund. FrontPoint head trader Jay Coyle also logged time at Tiger.
“There is no other hedge fund that has spawned as much talent as Tiger has,” says Antoine Bernheim, president of Dome Capital, publisher of The U.S. Offshore Funds Directory and hedgefundnews.com. “It speaks very highly about Julian’s ability to hire superior people, which is an extremely difficult thing to do. He has done it better than anyone else.”
Ex-Tigers seem to burn bright. This year Mandel’s Lone Pine is up 12 percent (gross) after racking up 50 percent returns in 2001. FrontPoint Partners has climbed more than 17 percent so far in 2002. On the other hand, Karr’s Joho, up 35 percent in 2001, was down about 1.6 percent for the first nine months of this year.
Robertson heaps special praise on three former Tiger analysts. “The most exemplary Tigers were Griffin, Mandel and Halvorsen,” he says. “A great deal of the success of Halvorsen’s funds is due to his leadership ability. He’s leading great, diverse investment personnel.”
Robertson credits Griffin not only with being “smart, ethical and competitive,” but also with bringing in “many great people who in turn brought in great people.” One Griffin find: Halvorsen.
As for retail stock specialist Mandel, Robertson calls him “the finest analyst I have ever seen. He was very disciplined. He had the respect of everyone who knew him.”
Plainly, Robertson is the kind of mentor you’d want writing you a letter of recommendation. But, his boosterism aside, why do so many cubs go on to become successful -- in some cases, spectacularly successful -- fund managers?
Start with talent. “He tended to hire good people,” points out one former cub. Beyond that, recruits were apt to be young, in many cases right out of business school or fresh from training programs at Morgan Stanley or Goldman, Sachs & Co. “They were highly intelligent, competitive and highly ethical,” says Robertson.
Less obviously, virtually all were jocks. Robertson believes that an athlete’s intensity translates into a burning desire to excel in the investment world. So it shouldn’t be surprising that Mandel built a squash court at his Connecticut home, Griffin runs iron man triathlons, and Halvorsen does adventure racing -- competing in multiple sports over an extended period under harsh conditions.
“I once said, ‘Let’s hire one complete nerd and see how he operates,’” Robertson recalls. “We never did. It would have been fascinating.”
A competitive streak was critical to surviving, not to mention thriving, at Tiger. At raucous twice-weekly meetings, analysts vied to get their stock ideas into the portfolio. Just one person -- Robertson -- made every investment decision.
Successful exTiger cubs later emulated Robertson’s system of buying the best stocks while shorting the worst. He stressed that shorts were critical, and, in fact, many of the big gains racked up by ex-cubs can be credited to shorts.
“Julian said you must work much harder on shorts to keep up with the longs,” says K2’s Saunders. “Most hedge funds don’t put in the time and effort on the shorts. Every meeting, he would say, ‘I want short ideas.’”
Most of the cubs became committed bottom-up stock pickers like Robertson. They made their analysts into industry specialists whose goal was to know everything about the companies in a given sector.
Robertson’s disciples learned to tame risk by keeping positions small and diversifying. One former cub reports that he also picked up on the importance of thoroughly checking out company managers -- not just for the obvious: where they went to school, where they had worked before -- but who knew them and what those acquaintances thought of them. “Do they have the integrity and desire to work for shareholders?” he remembers Robertson asking.
Shumway recalls how Robertson’s obsession with management led him to steer away from former WorldCom chairman Bernard Ebbers early on. Robertson wasn’t comfortable when Shumway persuaded him to invest in LDDS Communications, the forerunner to WorldCom. “He would always ask me, ‘When can we sell the high school basketball coach?’"says Shumway. The reference was to Ebbers’s job before he entered the corporate world.
As a result, Robertson sold WorldCom before the stock’s exponential rise. But then, he didn’t own it when the company collapsed in mid-2002 after becoming embroiled in what may be the largest case of corporate fraud in history.
Another former cub acquired an investing skill from Robertson that features in no textbook. He recalls that the Tiger chief waited several years before seeing any positive results from a big investment in palladium -- then his money multiplied sixfold. “The guy’s got patience,” says the former cub admiringly. Most good teachers do. -- S.T.
Earning their stripes Tiger Management founder Julian Robertson’s latest litter of “cubs” -- as the portfolio managers he has nurtured over the years are fondly known -- appears to be one of the most promising. Mostly in their 20s or 30s, they manage a chunk of Robertson’s fortune as well as their own money. But most also cater to wealthy individual investors under the Tiger brand name. Their track records at the hedge fund firm -- though short -- are by and large dazzling, and they invest in everything from retailers to emerging-markets debt. Meet the new generation.
THOMAS FACCIOLA, 36
MICHAEL SEARS, 40
Tiger Shark Management
Returns -- 2001: 38 percent; 2002*: 3.7 percent
The first time Julian Robertson approached him with a job offer, in the mid-1990s, Tom Facciola turned it down flat. “I was not ready for the buy side,” confides Facciola, then a Salomon Brothers specialty financial company analyst and top-ranked Institutional Investor All-America Research Team member. But by 1998 the demands of the sell side, especially the travel, were sapping his motivation. “There were days I couldn’t get out of bed,” recalls the Staten Island native. “I wanted to either resign or manage money.”
So in 1999 his then-employer, Lehman Brothers, let him run the firm’s in-house hedge fund. In his first month the fund tumbled 8 percent: Facciola had tried to short Internet stocks in the midst of the tech mania. “I learned that fundamentals are not everything in the short term, only in the long term,” he says ruefully.
What Facciola was also learning fast were the limitations of running a hedge fund inside an investment bank. “I couldn’t trade our clients, I couldn’t get outside research, and the thinking was short term,” he says.
In early 2000 Robertson called again. “He said he was trying to turn Tiger around,” Facciola recalls. Despite the uncertainty and the fact that Tiger was operating under its high-water mark (precluding portfolio managers from partaking of immediate gains), he and Michael Sears signed on. The pair had worked together at Lehman Brothers for the preceding three years and at Salomon Brothers before that."I had a two-year contract” at Tiger, Facciola says matter-of-factly.
That was fortunate, because within a couple of months, he was helping Robertson shut down his funds -- “quickly,” says Facciola.
In February 2001 he and Sears launched Tiger Shark, a long-short equity fund specializing in banks and other financial stocks, with about $20 million in seed money that came almost entirely from Robertson. The fund finished the year up 38 percent, and it now runs about $185 million for Robertson and external investors.
Facciola says their secret as investors is that they look at cash earnings, while 95 percent of analysts rely on generally accepted accounting principles earnings. “GAAP doesn’t necessarily reflect what’s really going on out there,” Facciola contends. “If you can exploit the difference between cash earnings and GAAP earnings, you can make a lot of money.”
He points out, for example, that the largest expense for consumer finance companies is loan losses, yet GAAP rules allow the companies to estimate those losses. The result: high revenues but unrealistically low expenses.
Like Robertson (see interview, above), Facciola is worried about ballooning consumer debt. “Some consumers are like goldfish,” he says. “They eat until they explode.”
So, on the short side Tiger Shark is loading up on consumer banks, automakers and luxury-boat manufacturers. On the long side Facciola and Sears favor a couple of banks that do little consumer lending: Bank of New York and Mellon Financial Corp. They have also been stocking up on Anheuser-Busch Cos. for the past four years. They like hospital companies, notably Humana, and have been picking up defense stocks, especially Raytheon Co.
“We’re having fun,” declares Facciola. “And you don’t make this kind of money drinking beer and meeting girls.”
BILL HWANG, 38
Returns -- 2001: 70 percent; 2002*: 2 percent
Bill Hwang came to the U.S. from Seoul, South Korea, at 18 in 1982, when his father was named pastor of the evangelical Korean-American Church in Las Vegas. Bill was able to write and read English but could barely speak the language. Yet within six years he had graduated from the University of California at Los Angeles and gone on to Carnegie Mellon University for an MBA.
Hwang was working as a broker at Hyundai Securities in New York when South Korea opened its stock market to foreign investors at the start of 1992. That “changed my life,” he reports. Armed with his broker’s license, a Nelson’s directory of institutional investors and a guide to offshore funds, he cold-called prospects day and night. “I thought, Who in their right mind would invest in Korea?” he says. “But I did what I was told.”
Eventually, he cold-called Tiger and struck up a relationship with analyst Robert McCreary. “He said, ‘Bill, what can you do for me that the others can’t?’” Hwang recalls. The Hyundai broker replied that he had no research to offer but could introduce Tiger analysts to key South Korean businessmen. “Tiger wanted to meet important people,” he says. “I made it happen.”
But it was not until four years later that Robertson got around to asking the broker to join the firm. “I never thought he would offer me a job,” admits Hwang.
Robertson felt that South Korea was the cheapest global market in the mid-1990s, and Hwang encouraged him to launch a proxy fight against South Korean telecom giant SK Telecom. In time the company would become one of Tiger’s largest positions, worth $1.5 billion when it was sold.
“He relied on me for the strategy,” Hwang says. “No one would argue with the family that controlled the conglomerate.” After about a year SK Telecom’s management bought Tiger out, and the firm pocketed about $1 billion from its roughly $500 million investment.
When Robertson closed down his funds, he asked Hwang to stay on and run money in Asia. “Julian is value biased, so I focused on Korea,” he says.
In January 2001 Hwang launched Tiger Asia with $16 million of Robertson’s and his own money. The fund finished 2001 up 70 percent, mostly on the strength of South Korean stocks, which accounted for 80 percent of its investments. In March 2002 Tiger Asia, with $140 million in assets, closed to new investors.
Hwang ordinarily shuns tech stocks and holds no export-oriented issues. He focuses on domestic revenue-generating companies, mostly financials, telecoms, consumer goods manufacturers, drug companies and utilities. “I know management and have local skills,” he says.
PATRICK MCCORMACK, 40
Tiger Consumer Partners
Returns -- 2001: 20 percent 2002*: 7 percent
When Pat McCormack joined Tiger Management in September 1999, he knew the hedge fund was having trouble. “It was a hard decision,” he says, “but it was time to move on from the sell side.” He had spent 12 years covering retail stocks, the first ten with Dean Witter, Discover & Co. and the last two with Alex. Brown & Sons.
“I made it my business to know Steve Mandel -- he was the guru,” says McCormack of the former Tiger cub who specialized in consumer stocks and now runs Lone Pine Capital.
Shortly after Robertson shut down his funds, he offered McCormack the chance to run some of his personal wealth as well as his foundation’s money. That assignment evolved into the June 2000 launch of Tiger Consumer, which focuses on consumer stocks, with a special emphasis on retailers. By the end of that year, the new fund was up 17 percent; in 2001 it climbed a further 20 percent, and this year through late November, it was also ahead.
“My fund is a stock picker’s fund,” McCormack says. “The direction of the stock market or retail stocks does not influence what I do. What does is the performance of my longs and the performance of my shorts.”
The retail sector lends itself to Robertson’s hedge-investing approach. “There are always companies gaining market share and losing share,” McCormack points out. For instance, a classic play for the past decade, he says, was to go long Wal-Mart Stores and short Kmart Corp.
He sees the long play in Wal-Mart now to be its food retailing business. “They have perfected it over the past seven years and are now hitting stride,” McCormack contends. “They are pricing food 25 to 30 percent less than supermarkets.” Not surprisingly, he is short supermarkets, such as Albertson’s, Kroger Co., Safeway and Winn-Dixie Stores.
McCormack says the used-car retailer Carmax Group currently comes closest to his standard for a long-term hold: a company that is building a truly better mousetrap. It has 35 to 40 locations, a one-price, no-haggle policy and treats financing as a separate transaction from buying. “It’s consumer friendly,” he says.
How different is managing money from being a sell-side analyst? Says McCormack: “A portfolio is like a living and breathing thing that is continuous through time. It’s marked to market everyday. You must decide at that price whether you like it.”
CHASE COLEMAN, 27
Returns -- 2001: 52 percent; 2002*: 20 percent
“Chase Coleman is one of the most competitive people I’ve ever met,” says one former Tiger cub. Perhaps that explains why Coleman’s fund, Tiger Technology, was up 52 percent last year after its March launch, and a further 20 percent through late November.
Many observers deem Coleman the star among the young cubs. In fact, the mere existence of a fund like his is a testament to how highly he’s thought of by his boss. “I don’t much believe in tech,” grants Robertson. “It is not the place to be.”
Coleman, who wouldn’t consent to an interview, is in a way as averse to tech as Robertson: His portfolio consists almost entirely of shorts.
Coleman graduated with an economics degree from Williams College in 1997 and joined Tiger Management that year as a technology analyst, becoming a partner three years later. Before founding Tiger Technology L.P., he was an assistant portfolio manager with Tiger Technology LLC, an investment partnership that existed from May through December 2000.
J. KEVIN KENNY JR., 35
Emerging Sovereign Group
Return -- 5 percent**
Kevin Kenny joined Tiger Management in mid-January of this year, well after Robertson had closed his funds. But as the former head of emerging-markets-debt trading for Morgan Stanley & Co., he had long conducted business with Tiger’s macro team. “I’ve known Julian since the 1990s,” he says.
Two other hedge funds asked Kenny to run a slice of their portfolios, but he chose Tiger because Robertson offered him the chance to manage his own fund and run some of the Tiger founder’s own money. Today Kenny invests some $225 million for Emerging Sovereign on behalf of individuals and institutions. The fund is closed, and Kenny intends to return capital to investors once he gets up to $400 million. “This size is correct for our asset class,” he explains.
A Duke University grad with an MBA from Wharton, Kenny became an emerging-markets expert almost by accident. Morgan Stanley hired him, for a second time, in 1994 (he’d quit two years earlier to get his business degree). Although Kenny was supposed to trade high-yield U.S. corporate bonds, he wound up dealing in Eastern European and African debt; in 1996 he took over the firm’s emerging-markets-debt trading globally. Two of his key analysts from those days -- Mete Tuncel and Yoon Chang -- have joined him at Tiger.
Kenny tries to temper risk by going short as well as long only in the sovereign debt of “the most liquid of emerging markets,” he says, avoiding such countries as Kazakstan, Ukraine and Vietnam. He won’t touch stocks or corporate bonds. “I should be able to collapse all longs and shorts in a couple of hours,” he says.
This year Kenny has been active in Brazil, which was one of the largest contributors to the fund’s performance on the short side. (Turkey was the most successful bet on the long side.)
But he scaled back his Brazil shorts in late fall because of abundant liquidity in the market. Nevertheless, he says, “the world is a dangerous place,” and he expects Brazil to come under pressure again in the first quarter of 2003.
“I’m mildly positive on emerging markets over the next 30 days,” Kenny said in late November. “But there are serious problems in the asset class -- most notably in Brazil.” -- S.T.
A stock picker’s picks Julian Robertson may be retired as a hedge fund manager, but he remains an active investor, chiefly through the Tiger “cubs” (story). Here are 15 stocks that he especially likes, mostly for their free cash flow value.
Clear Channel Communications (CCU)
Deluxe Corp. (DLX)
EchoStar Communications Corp. (DISH)
Fidelity National Financial (FNF)
Grupo Aeroportuario del Sureste (Mexico)
Infosys Technologies (India)
IStar Financial (SFI)
JetBlue Airways Corp. (JBLU)
Kinder Morgan (KMI)
Kookmin Bank (Korea)
Samsung Electronics Co. (Korea)
Sappi (South Africa)
Valero Energy Corp. (VLO)
William Hill (U.K.)
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