Thread - Remember Tom Kurlak?
Now @ Tiger Management, he's mentioned in this NYT article:
A Tiger Fights to Reclaim His Old Road
By RICHARD A. OPPEL Jr.
He probably got a little fat and happy," acknowledged Julian H.Robertson Jr.
Robertson, the man behind Tiger Management, was giving one reason that his hedge fund family had dwindled from more than $22 billion in assets at its peak last year -- when it pulled even with George Soros'
hedge fund shop -- to about $8 billion today.
For Robertson, who is widely regarded as one of the best investment managers of his time, the humbling comedown is perhaps the most dramatic reversal of recent memory in the money management business
-- not only because Tiger has lagged severely behind the broad stock market over the last 15 months, but also because its previous record was dazzling.
The loss of capital -- from both investor withdrawals and investments --has made Robertson, 67, a billionaire who in recent years has started spreading some of his wealth to philanthropies like Lincoln Center, intent on righting the firm before he retires. He has already made big changes in
some practices -- resulting in a different business model, Tiger officials say. But he remains committed to other practices, notably "value" investing, which has been out of favor lately on Wall Street.
As he ponders who will succeed him, he continues to have the final say over most investment decisions -- and is trying to persuade investors,who have removed $5.3 billion in the last year, not to retreat further.
Robertson blames the huge outflows, in some measure, for Tiger's dismal
performance -- and it is not clear when investors will stop leaving the
fund. Tiger's fourth-quarter redemptions will be paid in a few weeks, and
people on Wall Street say the number could be close to $1 billion.
And though about $1.3 billion of Tiger's money is largely locked up until
July 2002 -- money raised in a special offering two years ago by
Donaldson, Lufkin & Jenrette -- Robertson was confronted by some of
those investors at a contentious meeting on Nov. 1. One asked whether
an exception to the lockup could be made for longtime Tiger investors;
Robertson replied that he would have to look at that idea. But a person
close to Robertson said Tiger was not considering letting investors out
early.
Tiger officials confirmed that the meeting had become contentious, but
they declined to comment on fourth-quarter withdrawals, except to say
that they would be less than expected. A person close to the firm also
said that while investors in the special offering are allowed to withdraw a
small amount each year, they took out less than one-fifth of what they
could have this year.
Tiger remains one of the few large players in hedge funds, the $300
billion world of secretive partnerships that is off-limits to all but
institutions and the wealthiest individuals. Many of Tiger's investors,
which include multimillionaires, endowments and universities, had to
invest at least $10 million to get into the fund.
Like mutual funds, hedge funds invest pools of investors' money. But they
are different in that they can borrow huge sums to make freewheeling
bets on stocks, bonds, derivatives and other speculative investments.
Scrutiny of the industry has grown after the bailout of Long-Term Capital
Management, the Greenwich, Conn., fund that roiled markets last year
when its huge bets soured. Congress is weighing measures that could
bring greater disclosure of industry practices.
But the recent experiences of Tiger and some other large hedge funds
may signal that the days are over when big "macro" funds -- betting on
currencies and interest rates -- could profit by rattling world markets.
Globalization is rapidly curtailing market inefficiencies that Tiger and other
funds have been so adept at exploiting.
Tiger's problems began in October 1998, when the firm lost $2 billion in
a single day after the backfiring of a bet on the price of the Japanese yen
relative to the dollar. Tiger has since largely eliminated such macro
moves. "We decided primarily to return to what brought us to the party,"
Robertson said -- referring to plain old stock-picking.
Robertson has bounced back from bad periods before -- making big
gains in 1996 and 1997, for instance, after two subpar years. But even
some current investors question whether he can recover this time in
similar fashion.
"Is Tiger going to be able to rebound the same as it did then?" asked one
Tiger investor, who spoke on condition of anonymity. "I don't know. One
would certainly hope so, but I'm not sure anybody can say with certainty
that it's going to happen again." Succession, this investor added, "is an
issue for every investor in any sort of investment."
"If Julian were to say, 'I'm retiring tomorrow,' it would be an issue, as
well," the investor added.
In the eyes of Tiger's loyalists, terrible years are inevitable for any great
investor. They say that when Internet, technology and large growth
stocks eventually falter, Robertson's relative returns will improve greatly.
They see his problems largely as a result of logical but untimely and
unlucky bets, as well as of opportunistic attacks by others hoping to
profit from Tiger's travails.
And they say the heavy redemptions show how one bad year can make
fickle investors forget how Tiger has beaten the Standard & Poor's 500
stock index by an average of 11 percentage points a year for nearly two
decades.
Mark Kenyon, chief executive of Union Bancaire Privee Asset
Management, the United States investment arm of a private Swiss bank
and a longtime Tiger investor, said Tiger's poor results were "simply a
case of a great value investor in a market that's not value-oriented."
He added: "We're in a fickle time for investors, where they look at the
paper every day and see someone has just made some 21,000 percent
return on some Internet-related stock. It is the most difficult market
we've had in the last 25 years, a period in which Julian has been an
outstanding buyer of value."
Lee S. Ainslie III, who left Tiger six years ago as a managing director
and is now managing partner of Maverick Capital, a Dallas hedge fund,
described his former boss as "an extremely competitive person with a
great deal of pride."
"I believe his primary motivation has not been economic," Ainslie said.
"It's been for reputation, and I'm sure he feels it's awfully important that
he work hard to restore his investors back to the footing they expect."
Robertson has gained a reputation for being tough on his critics, an image
that results in large part from a libel suit he filed against Business Week
after an unflattering cover article in 1996.
Robertson dropped the suit a year later after the magazine, which made
no payment to Robertson, ran an editors' note saying its predictions
about Tiger's future performance were not borne out by subsequent
results, which included a 38 percent gain, after fees, in 1996, and a 56
percent gain in 1997. Still, many people decline to be identified as saying
anything remotely critical of Robertson.
Robertson concedes that part of the problem in the last year was his own
fault. "During the golden years," he said, the firm got too casual about its
research, "and did not really improve it the way we always had in the
past." Most notably, he said, the poor stock-picking manifested itself in
disastrous wrong-way bets on technology stocks. That included selling
some stocks short -- betting that they would fall by selling borrowed
shares in hopes of buying them back later for less.
"We had really lost an enormous amount of money in technology, and
that was primarily from being short," he said, noting that some other
short-sellers managed to do much better. "Look, it has been very
disappointing. It is a big, horrible morale hurdle. No winning team likes to
lose, and that's just fact."
If the market turns in Tiger's favor, then "we're geniuses," he said. "But
right now, we're dodos. That's just the way it goes."
A native of North Carolina, Robertson spent much of his career as a
stockbroker and money manager at Kidder, Peabody. But in 1980, he
left and founded Tiger with $8 million in capital, taking a name suggested
by one of his young sons.
Tiger's investments soared from the start, as the firm beat the S&P 500
by at least 20 percentage points, after fees, in five of its first six years.
Through last December, Tiger had an average gross return of 36 percent
a year.
After subtracting the firm's cut of one-fifth of investment profits,
Robertson's original investors have booked an average annual return of
29 percent -- far ahead of the 18 percent average for the S&P 500
index. An investment of $100,000 when Tiger opened in May 1980
would have been worth more than $11 million by last year, compared
with about $2.1 million for a similar investment in the S&P 500 index.
But beginning in the fall of 1998, Robertson seemed to step into every
pothole he had avoided during those 18 years.
First was the October currency loss. Later in that year, Tiger placed
enormous bets against stocks in two hot sectors -- telecommunications
equipment and technology. Tiger lost big amounts, for example,
short-selling shares of Lucent Technologies and Micron Technology, said
one person close to the firm.
Tiger now owns shares of both Lucent and Micron, this person said, and
it has invested heavily in some other technology stocks this year, including
Cisco Systems, Microsoft and Intel. Tiger finished last year down 3.9
percent.
Robertson declined to comment on specific short sales, but he
acknowledged that Tiger officials had mistakenly made big bets against
some companies without being "as aware of their close ties to the
Internet." Trying to sell short in this market, he said, is like being "run
over by a train that's going to derail a mile down the road."
But while Tiger has changed its opinion somewhat, Robertson is highly
skeptical of most Internet valuations and says the day will come when
money will bolt and flood into value stocks. "The Internet thing is just
beyond belief," he said.
In the last year, Robertson has hired a number of top analysts in the
technology, telecommunications and health care areas, most notably
Thomas Kurlak, a former Merrill Lynch semiconductor analyst. Tiger
now has the best analyst teams it has ever had to research those sectors,
Robertson said.
Some hires have been guaranteed sizable long-term pay packages in part
to make up for the effects of Tiger's "high water mark" clause in its
contracts with investors. The clause states that the firm cannot collect its
20 percent cut of profits until investors first recoup the losses of the last
year -- thus taking away a big component of employee compensation.
"We have spent a fortune on that, an absolute fortune," Robertson said.
The new technology hires have already shown results, he said, including a
62 percent return on a sub-portfolio started with $200 million in March.
But Robertson's main focus remains on value stocks, which contributed
greatly to Tiger's 22.5 percent loss this year through November. "Some
of these companies are selling at literally five and six times earnings and
selling at two and three times cash flow," he said. "It's just wild."
In August, Robertson's frustration with his largest holding, a 22.4 percent
stake in US Airways, prompted him to file a 13-D form with the
Securities and Exchange Commission indicating that he might seek to
have the airline sold. As to whether Tiger was searching for a buyer for
the airline, Robertson said only that "we have done some work in that
area."
But barring a buyer willing to pay a very large premium to the airline's
recent price of $30 a share, look for Robertson to hold his shares. At
Tiger's annual investor meeting in October, he acknowledged that he had
misjudged the outlook for US Airways. But he noted that the company
had repurchased about 30 percent of its stock over the last 19 months,
and he predicted it could generate as much as $640 million in free cash
flow in 2001 -- or about a third of the company's current market value.
"We're not about to sell our shares," he said.
If the difficulties with currencies, technology short-selling and value
stocks were not enough, Tiger had another problem: As part of reducing
the amount of borrowed money it had invested and raising cash for
investor withdrawals, Tiger has unwound more than $100 billion of its
positions since October 1998. Its total exposure -- stocks, short sales,
currency and interest rate bets, derivatives and other holdings -- has
fallen to less than $25 billion, from $125 billion. That includes selling
more than $40 billion worth of stocks.
In other words, a fire sale. Philip Duff, Tiger's chief operating officer,
said: "How many financial institutions could have a $100 billion
downsizing of their balance sheet, or an 80 percent reduction? Few of
those would probably survive."
The asset sales have given others on Wall Street a chance to make easy
money at Tiger's expense by selling their top holdings short, with the
knowledge that the firm would probably have to sell big blocks to meet
redemption demands or to stabilize its portfolio. Other investors who
owned those stocks also sold them, fearing that they would lose value if
Tiger dumped many shares.
For Duff, confirmation of this effect came last June, after a report that
Tiger could face $3 billion in second-quarter redemptions. (The real
number was about $1 billion.) Within 15 minutes, he said, the computer
generating Tiger's real-time profit-and-loss statement showed that the
firm had lost $72 million while the overall market stayed flat.
As the worry over Tiger reached a frenzy in late summer, short positions
in many of its big holdings soared. From August to October, for example,
the number of US Airways shares sold short rose to 3.8 million from 1.6
million. Federal-Mogul, the auto parts maker, saw total short sales leap
from 3.7 million to 6.5 million between September and October.
Tiger's efforts to reduce the amounts it had borrowed to make
investments are now largely complete, and the heavy pace of
redemptions cannot continue indefinitely. Of the firm's $8.1 billion under
management, about $2 billion is locked up for several years, and another
$2 billion is held by Robertson and other Tiger officials.
Tiger had also considered limiting longtime investors to redeeming shares
only twice a year instead of quarterly, but Robertson said he had since
decided that beginning in January that policy would apply only to new
investments.
The problems of the last year aside, uncertainty about who will succeed
Robertson is of great importance to Tiger investors and, one former Tiger
employee said, has contributed to decisions by some valued analysts and
traders to leave Tiger.
The issue "caused people to increasingly question or doubt" their future
role, this person said.
Tiger's alumni include a number of rising industry stars, like Ainslie and
Lawrence Bowman of Bowman Capital Management in San Mateo,
Calif. Some of this year's departing traders have already set up their own
funds, including Andreas Halvorsen, a former director of equities at Tiger
who now runs Viking Global Investors in New York. He declined to
comment.
Succession remains an open question, Robertson said, adding that one
reason he hired Duff, a former Morgan Stanley chief financial officer, last
year was to help map out succession as well as to give the firm more
structure.
"We are all unfortunately aware of my age, and Phil is busily addressing
that as well as he can," Robertson said. "It's a little hard, psychologically,
for me to be talking about death, but on the other hand, it has to be
thought about. Frankly, I don't want to be doddering around here at age
90 running this portfolio."
One possibility, he said, could spring from the start earlier this year of five
subportfolios -- each run by a team of analysts with minimal oversight by
Robertson -- in technology, telecommunications, health care, Japanese
stocks and financial stocks. Their performance could help identify people
to promote, Robertson said, but he does not rule out bringing in someone
from the outside.
Tiger is also considering starting sector hedge funds to invest in specific
industries like technology or telecommunications.
Tiger, which has about 100 employees, has lost one-fourth of them this
year -- including some who quit and some who were asked to leave. But
Robertson plays down any notion that either uncertainty about the firm or
his sometimes rough management style -- "Look, I have a temper," he
acknowledged -- has created a brain drain.
"We've had a history of losing people," he said, but "as long as you have
a stream of good people coming through here, that doesn't affect you in
the least." Tiger has hired 15 analysts this year, people there say.
It is anybody's guess how long Robertson will remain at Tiger's helm. But
one longtime hedge fund consultant, Lee Hennessee, whose family has
known the Robertsons most of this century, noted that Robertson's father
kept going to work until he turned 94. "Once the dust settles," she said, "I
think he'll be just like his father." |
