Discovery Is Off to a Strong Start

How the macro firm has positioned itself.


Discover Capital

Discovery Capital Management has started the year strong.

The macro firm’s Discovery Global Opportunity Fund was up 16.93 percent for the first quarter after gaining 7.19 percent in March, according to a monthly report sent to clients and seen by Institutional Investor.

The fund, headed by Tiger Cub Robert Citrone, has continued to surge this month, gaining 6.7 percent through April 18, says an investor. This puts the fund up 24.4 percent year-to-date. In the report, Discovery told clients it is closing its Partnership share class to new investments starting August 1, but its Standard share class will remain open. Discovery declined to comment.

The firm also told clients it made money in the first quarter across all asset classes despite running a cautious portfolio, as it was net short developed markets equities and rates and long the U.S. dollar. First-quarter gains were driven by emerging markets, which kicked in 15.9 percent to gross gains, led by long exposure to Latin America — particularly Argentina and Ecuador — and India. Other top contributors were commodities, driven by digital assets and some energy and short China-related themes.

The largest drags on first-quarter performance were developed markets positioning, costing the fund 2.2 percent of gross performance, led by short equity positioning in the U.S., Japan, and Europe. More specifically, Discovery’s three largest detractors were longs in emerging markets excluding Asia, longs in consumer equities, and shorts in Europe.

Heading into the second quarter, Discovery said in the letter, “it continues to struggle to be bullish on developed market equities” given current market valuations and crowded positioning. In general, Citrone is telling clients that stock valuations are stretched and overall positioning is long. But the firm conceded that the U.S. in particular has been harder to call given the resilience of the jobs market and the economy.

“While we do think that stickier inflations, the risk of less interest rate cuts, and a reduction in liquidity will ultimately reprice equity markets lower, the timing is uncertain,” Discovery added. “We remain focused on monitoring liquidity and earnings.”

Discovery is currently short select U.S. equities in financials and consumer discretionary stocks as well as rates. It is not short tech stocks or the S&P 500 but is short lower-quality stocks, says an investor. It is also short China, mostly through the currency as well as some equities; Turkey, primarily through credit default swaps exposure; and Europe, mainly through index exposure to subordinated-bank debt, some equities, and the euro. In addition, Discovery is short Japan across select equities and rates.

“In Japan, we see the [Bank of Japan] shifting their focus from rates to the currency,” Discovery noted in the report. “They are now tightening alongside the U.S. and [the European Central Bank], with their shift in yield curve control. We have increased our short rate positioning while flattening our short yen.”

At the same time, Discovery is long Latin America “anchored in Argentina” through equities and sovereign bonds, Mexico (equities and currency), and Ecuador (sovereign bonds). It is also long select U.S. corporate credit and Indian equities and some rates. In addition, the firm is long the dollar versus China, Taiwan, and South Africa, an investor says.