Whitney Tilson is shutting down his hedge fund

[cubsfan]

This is sad. I've talked with Whitney several times and he seems like a nice guy.

 

This seems to be a widely shared view:

 

https://twitter.com/AlexRubalcava/status/913428918526447619 (thread)

 

I'd agree completely with this view. Tilson was always extremely generous with his time whenever I approached him.

Guys like Tilson make the value investing community pretty special.

[Dazel]

 

"A man who carries a cat by the tail learns something he can learn in no other way"

Mark Twain

 

"Investing is not supposed to easy"..."Anyone that finds it easy is stupid"

Charlie Munger

 

Good luck in life Whitney Tilson congratulations for taking a shot at your dream and experiencing the ups and downs that make us men. I have no doubt that you will sleep well and I have no doubt that the wisdom you pass on will be a most precious gift to those that listen.

 

As for all the arm chair quarterbacks and bullshit luck speculators that think you know what you are doing...be warned. You don't.

 

Top of the Market?

 

Dazel.

[Guest Cameron]

 

"A man who carries a cat by the tail learns something he can learn in no other way"

Mark Twain

 

"Investing is not supposed to easy"..."Anyone that finds it easy is stupid"

Charlie Munger

 

Good luck in life Whitney Tilson congratulations for taking a shot at your dream and experiencing the ups and downs that make us men. I have no doubt that you will sleep well and I have no doubt that the wisdom you pass on will be a most precious gift to those that listen.

 

As for all the arm chair quarterbacks and bullshit luck speculators that think you know what you are doing...be warned. You don't.

 

Top of the Market?

 

Dazel.

 

That would be a shame if it is, just when his short would have worked out.

[Gregmal]

 

"A man who carries a cat by the tail learns something he can learn in no other way"

Mark Twain

 

"Investing is not supposed to easy"..."Anyone that finds it easy is stupid"

Charlie Munger

 

Good luck in life Whitney Tilson congratulations for taking a shot at your dream and experiencing the ups and downs that make us men. I have no doubt that you will sleep well and I have no doubt that the wisdom you pass on will be a most precious gift to those that listen.

 

As for all the arm chair quarterbacks and bullshit luck speculators that think you know what you are doing...be warned. You don't.

 

Top of the Market?

 

Dazel.

 

That would be a shame if it is, just when his short would have worked out.

 

I recall Tilson actually writing a great piece on exactly this. Quite humble It was maybe late 2015 into mid 2016 where he acknowledged no longer being able to take it and covering almost all of his short book in November, only to see 90% of them declined by something crazy (like 60% on average) over the next 6 months.

[dyow]

he should focus on the value investor digest, i have read a couple of issues, they were pretty good. 

[DooDiligence]

 

"A man who carries a cat by the tail learns something he can learn in no other way"

Mark Twain

 

"Investing is not supposed to easy"..."Anyone that finds it easy is stupid"

Charlie Munger

 

Good luck in life Whitney Tilson congratulations for taking a shot at your dream and experiencing the ups and downs that make us men. I have no doubt that you will sleep well and I have no doubt that the wisdom you pass on will be a most precious gift to those that listen.

 

As for all the arm chair quarterbacks and bullshit luck speculators that think you know what you are doing...be warned. You don't.

 

Top of the Market?

 

Dazel.

 

That would be a shame if it is, just when his short would have worked out.

 

I recall Tilson actually writing a great piece on exactly this. Quite humble It was maybe late 2015 into mid 2016 where he acknowledged no longer being able to take it and covering almost all of his short book in November, only to see 90% of them declined by something crazy (like 60% on average) over the next 6 months.

 

If only he had Michael Burry as the gatekeeper.

[BG2008]

Back in 2009/2010, I was riding the subway in NYC and I saw Tilson standing in front of me in a packed morning train.  I whispered to him in a bit of value fan boyish tone "you're Whitney Tilson", despite my effort to keep the voice as quiet as possible, people heard it on the train.  A few heads were turned and I was slightly embarrassed.  But like most New Yorker, no one gave a damn after the first few seconds.  Tilson was polite and went on to invite me to his gathering in Omaha.  I do not have a ton of interaction with him, but I generally agree that he's a nice guy. 

 

I think shorting is extremely difficult.  Fundamentally it has to do with how the nature of shorting affects your psychology and position sizing when price moves against you.  A long value position has antifragile and/or negative feedback loop characteristics when price goes down (assuming business and management fundamentals are still intact).  It naturally leads to buy low and sell high.  Short positions are the opposite, it has finite upside and unlimited downside.  It can't be sized large.  Time works against your position.  It's just a tough way to make a living and tough way to sleep at night.  I also question the true alpha generation over time.  Back in 2011-2012, I tried shorting and buying puts.  Nothing work.  Overtime, I've wised up and resort to just buying deeply undervalued that I can hold for the long term.  There is a lot of wisdom in being able to hold onto a position for 3-10 years despite a lower rate of compounding.  I think it wasn't just Tilson's short performance that hurt his long term performance, it was also the brain damage and the resources that it soaked up. 

 

I wish him best luck in his endeavor.  I think he can do wonders by focusing his energy and communication skills into social changes.  He's a phenomenal communicator and seems to have the energy to write 10 page communications every two weeks. 

[TwoCitiesCapital]

 

"A man who carries a cat by the tail learns something he can learn in no other way"

Mark Twain

 

"Investing is not supposed to easy"..."Anyone that finds it easy is stupid"

Charlie Munger

 

Good luck in life Whitney Tilson congratulations for taking a shot at your dream and experiencing the ups and downs that make us men. I have no doubt that you will sleep well and I have no doubt that the wisdom you pass on will be a most precious gift to those that listen.

 

As for all the arm chair quarterbacks and bullshit luck speculators that think you know what you are doing...be warned. You don't.

 

Top of the Market?

 

Dazel.

 

That would be a shame if it is, just when his short would have worked out.

 

I recall Tilson actually writing a great piece on exactly this. Quite humble It was maybe late 2015 into mid 2016 where he acknowledged no longer being able to take it and covering almost all of his short book in November, only to see 90% of them declined by something crazy (like 60% on average) over the next 6 months.

 

Seems like he got whipsawed quite a bit? Was short Netflix back in 2010/2011ish. Realized a good losses on the way up and flipped at the top when he suddenly went long - right before it dropped by ~75%.

 

Maybe he just doesn't have the right personality for being a contrarian? Or maybe should've focused a bit more on risk management so he could stay in his positions? As someone else mentioned, it seemed many of his ideas were derived by others. Maybe that's why he didn't have the conviction to stay with them?

 

He did always seem like a nice and sociable guy, but I never really had any reason to have much respect for him as a "super" investor that he seemed to gain a reputation as within value circles.

[Gregmal]

 

"A man who carries a cat by the tail learns something he can learn in no other way"

Mark Twain

 

"Investing is not supposed to easy"..."Anyone that finds it easy is stupid"

Charlie Munger

 

Good luck in life Whitney Tilson congratulations for taking a shot at your dream and experiencing the ups and downs that make us men. I have no doubt that you will sleep well and I have no doubt that the wisdom you pass on will be a most precious gift to those that listen.

 

As for all the arm chair quarterbacks and bullshit luck speculators that think you know what you are doing...be warned. You don't.

 

Top of the Market?

 

Dazel.

 

That would be a shame if it is, just when his short would have worked out.

 

I recall Tilson actually writing a great piece on exactly this. Quite humble It was maybe late 2015 into mid 2016 where he acknowledged no longer being able to take it and covering almost all of his short book in November, only to see 90% of them declined by something crazy (like 60% on average) over the next 6 months.

 

Seems like he got whipsawed quite a bit? Was short Netflix back in 2010/2011ish. Realized a good losses on the way up and flipped at the top when he suddenly went long - right before it dropped by ~75%.

 

Maybe he just doesn't have the right personality for being a contrarian? Or maybe should've focused a bit more on risk management so he could stay in his positions? As someone else mentioned, it seemed many of his ideas were derived by others. Maybe that's why he didn't have the conviction to stay with them?

 

He did always seem like a nice and sociable guy, but I never really had any reason to have much respect for him as a "super" investor that he seemed to gain a reputation as within value circles.

 

I think being too giddy, something that plagues a lot of managers, has harmed him. In the GM thread several people were discussing this with Einhorn too. I've never understood how some people so frequently go bullish, to bearish, to bullish or whatever on a specific name or sector so regularly. At a certain point you are gambling.

 

He was never really a contrarian IMO, more of an idea gatherer. I wanna say Pabrai also does this frequently, as do probably a lot of no name managers and investors. The guy was well connected. But I question whether he fully internalized all the work being done on a basis frequent enough to keep up with it. No question he loves investing. He's also a really nice guy from what I've heard, although I've never met him. But his investment results seem to be all over the place fundamentally, informationally dated a lot of the time, and unoriginal(as in someone else's idea). Combine that with smart guy ADD(having to be constantly active with a portfolio), and idk, I can kind of see why he got whipsawed. Reacting instead of acting.

 

The criticisms I've heard are kind of consistent with your last statement. He kind of became a braggart, and promoted himself(as well as being promoted by others) as this super investor when a lot of people didn't think he deserved that credit. LL for instance, he did victory lap after victory lap on, when the ironic thing was that it wasn't even his idea to begin with! And then after the thing tanks to the low teens, there must have been at least 3-4 times when "Tilson covered his short and is now long", only followed by "Tilson is reshorting LL", and then "Tilson is adding to his short", which comes back to basking in the sun light and probably over-analyzing to the point of flip flopping so regularly.

 

I've actually learned a ton from reading his work and especially his reflections on a lot of his mistakes. He's incredibly candid with all of this, especially for a hedge fund guy. Hedge funders are notorious for being non-engaging, antisocial dick heads who avoid regularly engaging with the general public. Tilson was the antithesis of that which was hugely refreshing.

[nkp007]

 

I think being too giddy, something that plagues a lot of managers, has harmed him. In the GM thread several people were discussing this with Einhorn too. I've never understood how some people so frequently go bullish, to bearish, to bullish or whatever on a specific name or sector so regularly. At a certain point you are gambling.

 

He was never really a contrarian IMO, more of an idea gatherer. I wanna say Pabrai also does this frequently, as do probably a lot of no name managers and investors. The guy was well connected. But I question whether he fully internalized all the work being done on a basis frequent enough to keep up with it. No question he loves investing. He's also a really nice guy from what I've heard, although I've never met him. But his investment results seem to be all over the place fundamentally, informationally dated a lot of the time, and unoriginal(as in someone else's idea). Combine that with smart guy ADD(having to be constantly active with a portfolio), and idk, I can kind of see why he got whipsawed. Reacting instead of acting.

 

The criticisms I've heard are kind of consistent with your last statement. He kind of became a braggart, and promoted himself(as well as being promoted by others) as this super investor when a lot of people didn't think he deserved that credit. LL for instance, he did victory lap after victory lap on, when the ironic thing was that it wasn't even his idea to begin with! And then after the thing tanks to the low teens, there must have been at least 3-4 times when "Tilson covered his short and is now long", only followed by "Tilson is reshorting LL", and then "Tilson is adding to his short", which comes back to basking in the sun light and probably over-analyzing to the point of flip flopping so regularly.

 

I've actually learned a ton from reading his work and especially his reflections on a lot of his mistakes. He's incredibly candid with all of this, especially for a hedge fund guy. Hedge funders are notorious for being non-engaging, antisocial dick heads who avoid regularly engaging with the general public. Tilson was the antithesis of that which was hugely refreshing.

 

Really well said. I think the bolded parts are key. He has all the intelligence necessary to be a great investor and I was able to utilize many of his ideas by just buying and holding. Investing ADD is real and looking at stock prices every day will make the smartest people dumb. If he looked at his share prices once every six months instead what was likely multiple times a day, he would still be in business.

[randomep]

I knew his returns were bad but didn't realize how bad they were.

 

Year Whitney Tilson's Funds Performance S&P 500 Performance

2010 15.1%                                         15.1%

2011 -24.9%                                           2.1%

2012 -1.7%                                         16.0%

2013 16.6%                                         32.4%

2014 13.7%                                         13.7%

2015 -7.3%                                           1.4%

2016 3.8%                                         11.9%

Cumulative 8.4%                               132.6%

 

I got all this from Wikipedia.

 

Getting results this bad is pretty hard to do. I think at one time, under T2, he beat the S&P 500 by a little. This is crazy.

 

wow! how much did he manage at the end?

 

[randomep]

I knew his returns were bad but didn't realize how bad they were.

 

Year Whitney Tilson's Funds Performance S&P 500 Performance

2010 15.1%                                         15.1%

2011 -24.9%                                           2.1%

2012 -1.7%                                         16.0%

2013 16.6%                                         32.4%

2014 13.7%                                         13.7%

2015 -7.3%                                           1.4%

2016 3.8%                                         11.9%

Cumulative 8.4%                               132.6%

 

I got all this from Wikipedia.

 

Getting results this bad is pretty hard to do. I think at one time, under T2, he beat the S&P 500 by a little. This is crazy.

 

wow! how much did he manage at the end?

 

found the answer: $75M, if he takes 2%/per year that is still $1.5M per year

 

[Parsad]

I knew his returns were bad but didn't realize how bad they were.

 

Year Whitney Tilson's Funds Performance S&P 500 Performance

2010 15.1%                                         15.1%

2011 -24.9%                                           2.1%

2012 -1.7%                                         16.0%

2013 16.6%                                         32.4%

2014 13.7%                                         13.7%

2015 -7.3%                                           1.4%

2016 3.8%                                         11.9%

Cumulative 8.4%                               132.6%

 

I got all this from Wikipedia.

 

Getting results this bad is pretty hard to do. I think at one time, under T2, he beat the S&P 500 by a little. This is crazy.

 

wow! how much did he manage at the end?

 

found the answer: $75M, if he takes 2%/per year that is still $1.5M per year

 

Kudos to Tilson for taking the high road and graciously choosing to close his fund.  But $1.5M a year...and I believe he may have started with more capital...for an 8.4% cumulative return over 7 years?! 

 

Mohnish didn't get paid a nickel for 10.25 years, and he's still called a bum by some.  I think all fund managers should be operating using the "Buffett Partnership" model.  Cheers!

[LC]

I think all fund managers should be operating using the "Buffett Partnership" model.  Cheers!

I completely agree. And you know, IIRC the reason Buffett chose a 6% hurdle was because that was the average 30? year treasury rate at the time.

 

What are your thoughts on that? Or even a floating annual hurdle rate that mimics the 30 year?

[Parsad]

I think all fund managers should be operating using the "Buffett Partnership" model.  Cheers!

I completely agree. And you know, IIRC the reason Buffett chose a 6% hurdle was because that was the average 30? year treasury rate at the time.

 

What are your thoughts on that? Or even a floating annual hurdle rate that mimics the 30 year?

 

We've used 6%...Mohnish has used 6%...it certainly hasn't hurt either of us.

 

You'll get the argument that there are managers who have done very well for their partners even though they may have a "0.5 and 25","1 and 20", etc.  My rebuttal has always been then if they are that good, why NOT go to a  6% hurdle, no set management fee and only an incentive fee?

 

The set management fee protects the fund manager, not the partner.  The no fee, adequate hurdle (can't be less than 5%) and compensation based solely on incentive fee protects the partner and rewards the successful manager.  Cheers!

[Guest longinvestor]

To me, this thread is refreshing. Thanks to Tilson of course for spurring this conversation. And to many posts that are not personal from chest thumping, name calling etc. Good lesson on fees, leverage that are worth absorbing.

 

And oh, btw , heartfelt thanks to Parsad for peeling off the politics to it's own hole. Great toilet flush handle you have provided.

[Mephistopheles]

I think all fund managers should be operating using the "Buffett Partnership" model.  Cheers!

I completely agree. And you know, IIRC the reason Buffett chose a 6% hurdle was because that was the average 30? year treasury rate at the time.

 

What are your thoughts on that? Or even a floating annual hurdle rate that mimics the 30 year?

 

We've used 6%...Mohnish has used 6%...it certainly hasn't hurt either of us.

 

 

 

What do you use now? And what made you change?

[randomep]

 

Kudos to Tilson for taking the high road and graciously choosing to close his fund.  But $1.5M a year...and I believe he may have started with more capital...for an 8.4% cumulative return over 7 years?! 

 

Mohnish didn't get paid a nickel for 10.25 years, and he's still called a bum by some.  I think all fund managers should be operating using the "Buffett Partnership" model.  Cheers!

 

Prasad,

Mohnish, is certainly impressive in that he had the integrity to make his clients whole: + 6% / annum after 10 yrs. However, 6% return in 10 yrs is a 80% gain, the S&P 500 TR has return more than that in 10yrs, so as you said, he made a profit something like $8M above expenses, all for lagging the S&P500 TR.  Just want to clarify things for real......

 

thanks

[Gregmal]

 

Kudos to Tilson for taking the high road and graciously choosing to close his fund.  But $1.5M a year...and I believe he may have started with more capital...for an 8.4% cumulative return over 7 years?! 

 

Mohnish didn't get paid a nickel for 10.25 years, and he's still called a bum by some.  I think all fund managers should be operating using the "Buffett Partnership" model.  Cheers!

 

Prasad,

Mohnish, is certainly impressive in that he had the integrity to make his clients whole: + 6% / annum after 10 yrs. However, 6% return in 10 yrs is a 80% gain, the S&P 500 TR has return more than that in 10yrs, so as you said, he made a profit something like $8M above expenses, all for lagging the S&P500 TR.  Just want to clarify things for real......

 

thanks

 

I've mentioned it before but it amazes me how misguided the entire "he did/didn't beat the index" logic is. When someone puts their money in a CD, they'd be foolish to then say "darn, I under performed the S&P". If one buys a government bond, I'm sure they are not thinking about "beating the index". It is about risk adjusted returns and ultimately there are tons of different products out there that offering varying degrees of risks and rewards. There is a reason one puts money with, and pays a guy like Pabrai. Maybe it's just me, but at the forefront of the list would be the fact that he is both a talented investor, and a good, honest man, so he will be prudent with my money.

 

There was a time when hedge funds were viewed as alternative investments with little correlation to the markets and security against big declines. I guess now a days there is sooooo much focus on this "beat the index" syndrome that the by-product is 90% of fund managers, guys like Ackman, are just gunslingers who redefine "value investing" so they can sell excessive risk taking as "safe" to the investors, and then swing for the fences with OPM. I have a ton of respect for guys who under perform the almighty index because they stick to their core investment philosophy and er on the side of caution with their investor's money. In relation to this thread, as nice a guy as Tilson was, he was not one of those guys. Pabrai is.

[Tim Eriksen]

I knew his returns were bad but didn't realize how bad they were.

 

Year Whitney Tilson's Funds Performance S&P 500 Performance

2010 15.1%                                         15.1%

2011 -24.9%                                           2.1%

2012 -1.7%                                         16.0%

2013 16.6%                                         32.4%

2014 13.7%                                         13.7%

2015 -7.3%                                           1.4%

2016 3.8%                                         11.9%

Cumulative 8.4%                               132.6%

 

I got all this from Wikipedia.

 

Getting results this bad is pretty hard to do. I think at one time, under T2, he beat the S&P 500 by a little. This is crazy.

Here are the other years.

 

Year Whitney Tilson's Funds Performance S&P 500 Performance

1999 31.0%                                           21.0%

2000 -4.5%                                           -9.1%

2001 16.5%                                         -11.9%

2002 -22.2%                                         -22.1%

2003 35.1%                                           28.6%

2004 20.6%                                           10.9%

2005 2.6%                                           4.9%

2006 25.2%                                           15.8%

2007 -3.2%                                           5.5%

2008 -18.1%                                         -37.0%

2009 37.1%                                           26.5%

 

 

 

[LC]

Buffett was writing back in the 60s that the money managers job was to beat the index. The concept of risk adjusted return is imho used too much as a method to rationalize underperformance. 

[cubsfan]

 

Kudos to Tilson for taking the high road and graciously choosing to close his fund.  But $1.5M a year...and I believe he may have started with more capital...for an 8.4% cumulative return over 7 years?! 

 

Mohnish didn't get paid a nickel for 10.25 years, and he's still called a bum by some.  I think all fund managers should be operating using the "Buffett Partnership" model.  Cheers!

 

Prasad,

Mohnish, is certainly impressive in that he had the integrity to make his clients whole: + 6% / annum after 10 yrs. However, 6% return in 10 yrs is a 80% gain, the S&P 500 TR has return more than that in 10yrs, so as you said, he made a profit something like $8M above expenses, all for lagging the S&P500 TR.  Just want to clarify things for real......

 

thanks

 

I'm really having trouble with this - Monish has smoked the S&P on all, but I believe one of his funds. Where are you getting your data?

 

Are we going down this performance rathole again on the Pabrai funds?

[abyli]

I knew his returns were bad but didn't realize how bad they were.

 

Year Whitney Tilson's Funds Performance S&P 500 Performance

2010 15.1%                                         15.1%

2011 -24.9%                                           2.1%

2012 -1.7%                                         16.0%

2013 16.6%                                         32.4%

2014 13.7%                                         13.7%

2015 -7.3%                                           1.4%

2016 3.8%                                         11.9%

Cumulative 8.4%                               132.6%

 

I got all this from Wikipedia.

 

Getting results this bad is pretty hard to do. I think at one time, under T2, he beat the S&P 500 by a little. This is crazy.

 

wow! how much did he manage at the end?

 

found the answer: $75M, if he takes 2%/per year that is still $1.5M per year

 

Kudos to Tilson for taking the high road and graciously choosing to close his fund.  But $1.5M a year...and I believe he may have started with more capital...for an 8.4% cumulative return over 7 years?! 

 

Mohnish didn't get paid a nickel for 10.25 years, and he's still called a bum by some.  I think all fund managers should be operating using the "Buffett Partnership" model.  Cheers!

 

http://www.ria-compliance-consultants.com/2016/07/sec-revises-performance-fee-rules/

 

Unfortunately in US, you can not charge performance fee unless your clients are rich.

 

"Under the revised rule, in order for an investment adviser to charge a performance fee, the client must have $1 million ($1,000,000) under management at the time an advisory contract is entered into with the investment adviser to satisfy the assets-under-management test or the investment adviser must reasonably believe that the client has a net worth of more than $2.1 million ($2,100,000) at the time the advisory contract is entered into to satisfy the net worth test. "

 

It is now illegal to setup a buffett like partnership for regular people in US.

[BG2008]

 

Kudos to Tilson for taking the high road and graciously choosing to close his fund.  But $1.5M a year...and I believe he may have started with more capital...for an 8.4% cumulative return over 7 years?! 

 

Mohnish didn't get paid a nickel for 10.25 years, and he's still called a bum by some.  I think all fund managers should be operating using the "Buffett Partnership" model.  Cheers!

 

Prasad,

Mohnish, is certainly impressive in that he had the integrity to make his clients whole: + 6% / annum after 10 yrs. However, 6% return in 10 yrs is a 80% gain, the S&P 500 TR has return more than that in 10yrs, so as you said, he made a profit something like $8M above expenses, all for lagging the S&P500 TR.  Just want to clarify things for real......

 

thanks

 

I've mentioned it before but it amazes me how misguided the entire "he did/didn't beat the index" logic is. When someone puts their money in a CD, they'd be foolish to then say "darn, I under performed the S&P". If one buys a government bond, I'm sure they are not thinking about "beating the index". It is about risk adjusted returns and ultimately there are tons of different products out there that offering varying degrees of risks and rewards. There is a reason one puts money with, and pays a guy like Pabrai. Maybe it's just me, but at the forefront of the list would be the fact that he is both a talented investor, and a good, honest man, so he will be prudent with my money.

 

There was a time when hedge funds were viewed as alternative investments with little correlation to the markets and security against big declines. I guess now a days there is sooooo much focus on this "beat the index" syndrome that the by-product is 90% of fund managers, guys like Ackman, are just gunslingers who redefine "value investing" so they can sell excessive risk taking as "safe" to the investors, and then swing for the fences with OPM. I have a ton of respect for guys who under perform the almighty index because they stick to their core investment philosophy and er on the side of caution with their investor's money. In relation to this thread, as nice a guy as Tilson was, he was not one of those guys. Pabrai is.

 

This is well said.  Disclaimer, I am a fund manager.  I think measuring yourself against the S&P has hazards in that it becomes the benchmark that you care about the most.  In an 8 year bull market, it forces you to take on risk that you normally will not.  It is well known that you should lower your exposure when you can't find any value.  The markets give you returns when it is available not when you need it.  Let's assume that you gave money to a manager that hold 20-40% cash and he manage to compound it at double digits, but he trails the S&P by 1-2% a year, is he a bad manager in the post 2009 era?  His plan is to deploy the capital when we experience sell off periodically.  Is he providing value add?   

 

I would say that from the LP's perspective the best value add of working with a good manager is the elimination of the risk of "buy high and sell low."  With a S&P 500 index, who knows where it will go.  With a manager that you trust, it is easier to send him money when the market and/or his portfolio is down 20% assuming that the portfolio experienced merely price movements not permanent impairments.  We have conversations with our LPs about this topic all the time.  We talk about when may be a good entry, i.e. large 15+% selloffs in market, finding opportunities is like shooting fish in a barrel, etc.  As managers, we have an inherent understanding of our portfolio's private market NAV and the current price.  It is easy for us to know when our basket has gotten too cheap. 

 

I tend to have two kinds of investor conversations these days.  The first group looks at my track record and noticed that we've held 40% cash and are very impressed by what we've done.  We spend a ton of time on my investment process and my circle of competence.  We talk about ways that family office and HNW clients can collaborate on certain co-invest deals etc.  We talk about how families can add capital over time as opportunities arose.  The second group is married to "I need my manager to beat the S&P by 3% a year."  I don't care that you hold 40% cash.  I allocate my capital to you and I expect you to beat the S&P.  I don't care that the market is very high and good value opportunities are few.  I suspect that the first group will do well over time and the second group will likely put capital into the S&P index at exactly the wrong time.

 

Lastly, I think one must also consider the absolute level of return.  If the S&P is doing 13-15% annually, it will be harder to beat.  If the S&P is hovering around 3% CAGR or negative, it tends to serve the value investor better.  Finally, are you really providing a value add if the S&P is down 3% CAGR over 5 years and you're flat during that time frame?  The early 2010s were considered the lost decade where 10 year CAGR were flat or in the low single digits.  People seem to have no memories of that anymore.  I think the LPs would rather that you be up 8-12% CAGR during that time.  I think any manager who return double digits CAGR deserve credit (assuming no risky capital allocation).  Even Baupost couldn't beat the S&P in the 90s. Does that mean that they are not good managers?  They had 10 years to beat the index and trailed the S&P 500 by roughly 5.5% a year.  The math works out to roughly 13% for Baupost and 18.5% for the S&P index. 

 

    THE BAUPOST FUND S&P 500

12/14/90 $50,000.00 $50,000.00

10/31/91 $59,787.28 $61,807.01

10/31/92 $65,471.39 $67,963.62

10/31/93 $82,134.71 $78,116.01

10/31/94 $91,217.43 $81,134.73

10/31/95 $98,430.31 $102,587.46

10/31/96 $120,583.20 $127,306.16

10/31/97 $153,193.22 $168,186.49

10/31/98 $128,220.00 $205,175.00

10/31/99 $138,845.00 $257,840.00

10/31/00 $169,995.00 $273,545.00

[Guest Cameron]

 

Kudos to Tilson for taking the high road and graciously choosing to close his fund.  But $1.5M a year...and I believe he may have started with more capital...for an 8.4% cumulative return over 7 years?! 

 

Mohnish didn't get paid a nickel for 10.25 years, and he's still called a bum by some.  I think all fund managers should be operating using the "Buffett Partnership" model.  Cheers!

 

Prasad,

Mohnish, is certainly impressive in that he had the integrity to make his clients whole: + 6% / annum after 10 yrs. However, 6% return in 10 yrs is a 80% gain, the S&P 500 TR has return more than that in 10yrs, so as you said, he made a profit something like $8M above expenses, all for lagging the S&P500 TR.  Just want to clarify things for real......

 

thanks

 

I've mentioned it before but it amazes me how misguided the entire "he did/didn't beat the index" logic is. When someone puts their money in a CD, they'd be foolish to then say "darn, I under performed the S&P". If one buys a government bond, I'm sure they are not thinking about "beating the index". It is about risk adjusted returns and ultimately there are tons of different products out there that offering varying degrees of risks and rewards. There is a reason one puts money with, and pays a guy like Pabrai. Maybe it's just me, but at the forefront of the list would be the fact that he is both a talented investor, and a good, honest man, so he will be prudent with my money.

 

There was a time when hedge funds were viewed as alternative investments with little correlation to the markets and security against big declines. I guess now a days there is sooooo much focus on this "beat the index" syndrome that the by-product is 90% of fund managers, guys like Ackman, are just gunslingers who redefine "value investing" so they can sell excessive risk taking as "safe" to the investors, and then swing for the fences with OPM. I have a ton of respect for guys who under perform the almighty index because they stick to their core investment philosophy and er on the side of caution with their investor's money. In relation to this thread, as nice a guy as Tilson was, he was not one of those guys. Pabrai is.

 

This is well said.  Disclaimer, I am a fund manager.  I think measuring yourself against the S&P has hazards in that it becomes the benchmark that you care about the most.  In an 8 year bull market, it forces you to take on risk that you normally will not.  It is well known that you should lower your exposure when you can't find any value.  The markets give you returns when it is available not when you need it.  Let's assume that you gave money to a manager that hold 20-40% cash and he manage to compound it at double digits, but he trails the S&P by 1-2% a year, is he a bad manager in the post 2009 era?  His plan is to deploy the capital when we experience sell off periodically.  Is he providing value add?   

 

I would say that from the LP's perspective the best value add of working with a good manager is the elimination of the risk of "buy high and sell low."  With a S&P 500 index, who knows where it will go.  With a manager that you trust, it is easier to send him money when the market and/or his portfolio is down 20% assuming that the portfolio experienced merely price movements not permanent impairments.  We have conversations with our LPs about this topic all the time.  We talk about when may be a good entry, i.e. large 15+% selloffs in market, finding opportunities is like shooting fish in a barrel, etc.  As managers, we have an inherent understanding of our portfolio's private market NAV and the current price.  It is easy for us to know when our basket has gotten too cheap. 

 

I tend to have two kinds of investor conversations these days.  The first group looks at my track record and noticed that we've held 40% cash and are very impressed by what we've done.  We spend a ton of time on my investment process and my circle of competence.  We talk about ways that family office and HNW clients can collaborate on certain co-invest deals etc.  We talk about how families can add capital over time as opportunities arose.  The second group is married to "I need my manager to beat the S&P by 3% a year."  I don't care that you hold 40% cash.  I allocate my capital to you and I expect you to beat the S&P.  I don't care that the market is very high and good value opportunities are few.  I suspect that the first group will do well over time and the second group will likely put capital into the S&P index at exactly the wrong time.

 

Lastly, I think one must also consider the absolute level of return.  If the S&P is doing 13-15% annually, it will be harder to beat.  If the S&P is hovering around 3% CAGR or negative, it tends to serve the value investor better.  Finally, are you really providing a value add if the S&P is down 3% CAGR over 5 years and you're flat during that time frame?  The early 2010s were considered the lost decade where 10 year CAGR were flat or in the low single digits.  People seem to have no memories of that anymore.  I think the LPs would rather that you be up 8-12% CAGR during that time.  I think any manager who return double digits CAGR deserve credit (assuming no risky capital allocation).  Even Baupost couldn't beat the S&P in the 90s. Does that mean that they are not good managers?  They had 10 years to beat the index and trailed the S&P 500 by roughly 5.5% a year.  The math works out to roughly 13% for Baupost and 18.5% for the S&P index. 

 

    THE BAUPOST FUND S&P 500

12/14/90 $50,000.00 $50,000.00

10/31/91 $59,787.28 $61,807.01

10/31/92 $65,471.39 $67,963.62

10/31/93 $82,134.71 $78,116.01

10/31/94 $91,217.43 $81,134.73

10/31/95 $98,430.31 $102,587.46

10/31/96 $120,583.20 $127,306.16

10/31/97 $153,193.22 $168,186.49

10/31/98 $128,220.00 $205,175.00

10/31/99 $138,845.00 $257,840.00

10/31/00 $169,995.00 $273,545.00

 

I would say the difference in this situation is you're holding cash because you can't find opportunities in the US market which has rational reasoning behind it while Tilson was holding 60% cash because he thought the world was going to end because of an elected official. One of these things is not like the other.