why is a longstanding fund like tiger going belly up?
Macro Trouble
By Alan Abelson
"They carried out Julian Robertson last week. One of the last of the great
value investors, Julian decided he just couldn't take it anymore. More to the
point, the people whose money he managed decided they couldn't take it
anymore.
Julian, who was running something north of $20 billion a couple of years ago,
was down to his last $6 billion or so when he turned out the lights on his
celebrated hedge-fund complex, Tiger Management. The conventional
wisdom was that he was done in by staying with sensible stocks ("Old
Economy stocks," to use the silly but current cliche) in an irrational market, a
perception that he seemed eager to encourage (see Jaye Scholl's piece, "The
More Things Change...").
Now, it's true that his kind of stock -- encumbered by sales, earnings, even
dividends, to say nothing of real products -- has been out of favor for quite a
spell. And it's also true that he mostly shunned the kind of stocks that have
been all the rage, like the wild, wild 'Nets.
But that isn't the whole story of why Tiger lost its stripes, not by a long shot.
We've known Julian a bunch of years and have always been fond of him. We
also think he's a heck of a stockpicker. But the root of his troubles, we're
convinced, was not that he stuck too rigidly to his investment last -- but that
he didn't.
Two words -- and they're related -- explain Julian's downfall. The first is
"macro" and the second is "hubris."
Julian, we suspect, chafed at being just another superior hedge-fund manager.
He yearned for the acclaim, perhaps "celebrity" is a better way to put it, of a
George Soros. And the way to satisfy that very human but also very
dangerous yen was to take a leaf from George's book and become a macro
investor. It was a very boy thing.
Julian set out to become macro, moreover, in every sense: in the amount of
money he managed and in the way he managed it. On the latter score, from
the familiar ground that hedge funds trod and Julian plowed so well -- buying
stocks and selling them short -- he pushed out to the swamps of currency
speculation, emerging markets and even more arcane and treacherous terrain.
That worked fine for a while, particularly during that heady stretch when the
more frolicsome pros could get enormous mileage out of the emerging-market
bubbles, but the collapse of Asia in 1998 and Russia's default on its debt
ended the joy ride rudely and with a terrible thud.
Between bad guesses on Japanese currency and bad bets on emerging
markets, Julian dropped billions. Increasingly the past few years, what was
most conspicuously macro about Julian's performance were the macro hits
rendered to his portfolio.
The hubris-driven macro strategy, meanwhile, also affected his micro, or
stockpicking, tactics and not for the better. Selection undoubtedly hurt. But
what really hurt was the elephantine size of his holdings. In seeking to deploy
the billions it had accumulated, Tiger took huge positions in individual
companies. That can cause great discomfort if a stock goes against you. But it
can cause true pain for a hedge fund like Tiger.
If you're a megabuck investor who has attained a certain prominence and own
too much of a stock and sell even a share, word quickly gets around, and you
run the risk of killing the stock. But when you're a megabuck hedge-fund
investor in the same circumstances and the stock you own too much of is
leveraged, the negative effect is vastly magnified. Size is the enemy of
leverage, and a reasonable estimate is that Tiger was leveraged 4-to-l.
Our point, again, is that what did Tiger in was not that Julian hewed to value
investing. Quite the opposite. We contend that what did him in was that he
strayed from the investment straight and narrow in pursuit of some grand
agenda that had less to do, as it were, with fortune than with fame.
No one need pass the collection plate for Julian. Once his hedge-fund
portfolios are liquidated and his limited partners paid off, he'll have $1.5 billion
of his own dough left, which he plans to continue to invest. Frankly, if we
were a well-heeled investor and Julian were disposed to do so, we'd be more
than happy to have him manage our money along with his.
A certain wistful bitterness no doubt remains, but Julian has always been a fast
study. Once he has had a chance to reflect on his melancholy experience in
tranquillity, he's certain to make profitable use of adversity. Back at the old
stand and free of whatever impulses he may have entertained toward greater
glory, he'll do just fine."
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