Chase Coleman's Tiger Global Focusing on Financial & REIT Shorts (Quarterly Letter) ~ market folly

Thursday, May 7, 2009

Chase Coleman's Tiger Global Focusing on Financial & REIT Shorts (Quarterly Letter)

Today we'll be going over the latest from Chase Coleman's hedge fund Tiger Global. In their most recent quarterly letter, Tiger gives us some insight as to their portfolio and performance. Interestingly enough, Tiger's strong performance over the past quarter came entirely from the short side of their portfolio.

We track Tiger due to their strong performance and proven fundamental research methodology. In fact, Tiger Global is one of the hedge funds that comprises the Tiger Cub Portfolio created with Alphaclone, where you can replicate their positions and enjoy 15.5% annualized returns since 2000. The numbers say it all and Tiger Global's contribution to such a portfolio is one of the many reasons we follow them. We'll provide a full background on Tiger at the bottom of this article, but let's start by getting into the latest updates:

Portfolio: Shorts

Rarely do you get a glimpse into a hedge fund's coveted short positions, and Tiger is no different. While no specific names are mentioned, they give us enough clues to where we can make an educated guess as to which stocks they are shorting in the current market. While they derived all of their gains from the short side of their portfolio last quarter, Tiger mentions that their shorts have been rallying against them, leaving them with gross exposure of 125% and net exposure of -5%. The interesting thing to note here is that despite the rally, they still have conviction on the short side.

In their quarterly letter, Tiger references some of the sectors they are targeting on short side, writing, "We continue to have high convictiction in our short positions in select financial institutions and REITs. Our financial short exposure consists primarily of US regional banks and European banks with exposures to poorly performing geographies." Their conviction derives from the fact that non-performing loans are actually increasing. They cite shorting companies with "many multiples of tangible common equity exposed to the worst categories of loans." Essentially, they are wagering that these companies won't be able to escape the massive burden in front of them.

On the REIT side of things, they are focusing mainly on apartments, retail properties, and industrial storage in both Europe and the United States. They note that equity offerings by various REITs have helped recapitalization for now, but they remain short under the notion that the free cash flow of these companies will decrease significantly over the years. It seems that equity offerings are all the rage in REIT-land these days and stocks of those underlying companies have been rallying... hard. We can only imagine the pain Tiger must be feeling from these names as Wall Street gets high on equity offerings and squeezes the shorts. By far the most interesting thing to take away from this is the fact that despite the rally, Tiger remains short with high conviction.

Portfolio: Longs

Tiger is waiting for more attractive multiples and clearer forward earnings before ramping up exposure. But, at the same time, they don't want to try and time the market since they are fundamental investors. They cite the term 'false dawns in bear markets' (a.k.a. bear market rallies) and state that they are very wary of them (hint, hint). Tiger still believes that the deleveraging of both financial institutions' and the consumer's balance sheets is the key. That said, they still like to focus on company specific situations, rather than the macro picture.

On the long side of the portfolio, Tiger references specific names they own, seeing how most of that information is already public anyways. (After all, we did cover Tiger's portfolio in our Q4 2008 hedge fund portfolio tracking series). In their letter, Tiger mentions that they are still long Apple (AAPL), Google (GOOG), and Qualcomm (QCOM). They also mention that they've started a position in (PCLN), citing their strong European presence and significant free cash flows. Outside of equities, they also mention that they have started two nameless positions in corporate credit.

Performance & Exposure

Tiger's first quarter 2009 performance was pretty solid as they were up 6.8% gross for the time period compared to a -11.7% performance for the S&P500 over the same timeframe. Their first quarter Sharpe Ratio was 1.1 and they had a standard deviation of 22.3% compared to S&P 42.1%. As we mentioned above, all of these gains were due to strong performance from the short side of their portfolio. Their long portfolio was down 2.6% for the period, even with strong performances from Mastercard (MA), who they name in particular. We had just noted that Mastercard was recently removed from Goldman Sachs' Conviction Buy List on the heels of strong earnings. The areas that hurt their portfolio were their Asian positions and then in the general sectors of Retail and Energy.

Tiger's short exposure to sectors with government intervention have obviously increased their portfolio's volatility and they are seeking to reduce the large swings they are seeing. Initially, they tried to combat this with high conviction ideas in a portfolio of low gross exposure. However, they say they will "opportunistically" reduce portfolio themes and exposures should volatility continue to wreak havoc on their consistency.

Fund Background

Chase Coleman is yet another 'Tiger Cub,' or manager who learned their trade under the watch of Julian Robertson while at (now defunct) hedge fund Tiger Management. Coleman attended Williams College and started Tiger Global with the blessing of Julian Robertson. His focus has always been on smaller cap names and on technology. Although, he has since expanded his horizons with time. In 2007, Tiger Global returned 70%, and from 2001-2007, Coleman bolstered an average return of 47%. And, as we mentioned earlier, they are a part of the Tiger Cub Portfolio created with Alphaclone, where you can replicate their positions and enjoy 15.5% annualized returns since 2000. In terms of additional activity, we've posted up Tiger's amended 13D filing on Longtop Financial Technologies (LFT) and also their portfolio in its entirety. We'll be updating Tiger's complete long portfolio here in about a week and a half, so stay tuned!

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