Viking Global's Short Positions Cause Lag: Investor Letter ~ market folly

Tuesday, July 28, 2009

Viking Global's Short Positions Cause Lag: Investor Letter

Andreas Halvorsen's hedge fund firm Viking Global was up only 0.5% net in the second quarter of 2009. This is compared to a 15.9% gain for the S&P500, and as such Viking is lagging substantially. In their latest investor letter, Andreas attributes this to the fact that their shorts constituted a higher drag than they normally would in a rising market. Their long-short spread for the quarter was -11% due to a return of 17% for their longs and 27.9% for their shorts. Simply put, their longs only rallied as much as the overall market did, while their shorts rallied more than the general market. Their gross exposure is now 112%, up from a previous 86% due to increased market movements and new ideas. Their net exposure is up to 37% from 29%. What's interesting is that despite the increases in each, they anticipate a further rise in gross exposure.


Viking had 145 equity positions at the end of the quarter (up from 125). Of those total positions, a whopping 47% of them were new positions started during the 2nd quarter. Viking made it explicitly clear in the letter that these 68 new positions are a result of their bottom-up stock picking style and "should not be interpreted as a bet on continued rising markets." Overall, they have 65 longs and 80 shorts where the largest long is 4.2% of the portfolio and their largest short is -2.3% of the portfolio. Their Viking Global Equities III Fund has $6.6 billion under management while their firm as a whole has $10 billion under management.

Long Positions

Their top 10 long positions as of Q2 2009 are as follows:

1. Invesco (IVZ)
2. Mastercard (MA)
3. Visa (V)
4. Unilever (UN)
5. DirecTV (DTV)
6. Google (GOOG)
7. JPMorgan Chase (JPM)
8. Walt Disney (DIS)
9. Bank of America (BAC)
10. Qualcomm (QCOM)

The top 10 positions listed above represent 32.2% of their capital.As you can see, this upper echelon of the portfolio is slightly different from when we last covered Viking's portfolio. Most notably, we see that Invesco has shifted up to top spot in their portfolio at 4.2% of capital. They believe that Invesco's "streamlined organization and improved investment performance position it well for continued growth in assets under management and a substantial widening of operating margins. Invesco has begun to generate positive net asset flows, which we expect will continue in the coming quarters. In addition, the company's option to participate in consolidation opportunities in the asset management industry adds to its attractiveness."

What is also intriguing is that 5 of their top 10 positions are either new or re-entered positions, including: Bank of America, Walt Disney, JPMorgan Chase, DirecTV, and Unilever. These positions leapfrogged a notably-absent-from-the-top-10 Apollo Group (APOL). Apollo was previously their largest holding and also was their largest loser on the long side of the portfolio. They reduced the size of their position when APOL reported earnings back in April. They believe the stock has "begun to react to potential legislative changes more so than to fundamentals." As such, it is no longer in their top 10 holdings.

While Halvorsen & Viking had been bullish on APOL previously, there is always the other side of the trade. Back at the Ira Sohn investment conference, there were conflicting opinions on the for-profit education plays. The conference, which features hedge fund manager investment ideas, featured both Stephen Mandel of Lone Pine Capital and noted short seller Jim Chanos of Kynikos Associates. Mandel (like Halvorsen) liked the for-profit plays and specifically liked Strayer Education. Chanos, on the other hand, thought there were too many barriers going forward and he seems to have won that argument as Viking has conceded for now sinec the stock has traded on these legislative fears rather than fundamentals. (You can view all of the investment ideas at the hedge fund manager conference here).

By industry group, Information Technology was definitely the largest overall contributor to Viking's profits on the long side of the portfolio in the second quarter as they were net long to the tune of 11.5%. They were also net long Media to the tune of 9.1%. In terms of sector exposure, Viking was net long consumer discretionary at 10.6%. By geography, they were net long the US/Canada at 29%. Their portfolio weighting in North American names was at the high end of their historical range, at 72% of gross exposure. By market cap, they were net long large caps at 36.6%.

Short Positions

On the other side, their ten largest short positions were 12.2% of capital. One sector bet to take note of was their net short position in Capital Goods (Industrials sector) at -4%. They were also net short Banks at -6.8%. This is similar to what we saw from Chase Coleman's Tiger Global investor letter where despite the pain they had felt in financials, they still have conviction on the short side. Viking's largest loss on the short side came from a short in the financial sector. In terms of individual short positions, Viking's largest short represented -2.3% of capital.

For those of you interested in following the progression of Viking's portfolio and investment style, we'd also recommend checking out their 2008 year-end letter.

Firm Changes

In their most recent letter, Andreas then goes on to address various changes happening within the firm. Most notably, we see that Viking's CFO Carl Casler has left the firm to join a start-up hedge fund. Additionally, on the operational side of things, Viking has "concentrated our trading activity with our strongest brokerage relationships to improve trade execution cost, and we have moved a large portion of our trades (as much as 50% on some days) to their electronic venues to maintain anonymity." This highlights the increased importance of 'secrecy' in hedge fund land as firms desire to tip-toe around the markets without drawing attention to themselves. They have also selected Morgan Stanley Fund Services to administer their Global Equities and Global Equities III funds.


Viking saw 4.9% of capital redeemed in the second quarter of 2009 and continued to run the fund "cash neutral by seeking to replace redemptions with offsetting subscriptions during the period." The majority of redemptions have been investors trimming their positions and as such has caused Viking to approach the limited number of slots they have available for investors as they seek to replace these redemptions with new inflows. They are evaluating how to address this and may end up enforcing the $1 million minimum for accounts and then increasing the minimum for prospective investors.

Some interesting facts from Viking are that they paid commissions totaling $89.6 million over the past year (through June 30th). Additionally, their average commission of all trades was 13.9 basis points which leads to $16.7 million being paid to brokers. It's always interesting to sit down and aggregate just how much a fund spends on these sorts of things.

Overall, Viking shifted around their portfolio and introduced a lot of new positions. Their longs rallied with the market but their shorts rallied more than the market, causing them pain. Invesco is their top position and they are confident in the name going forward. Their previous top position in Apollo caused them pain and as such they have reduced the position size out of the top 10 holdings. To compare how their current portfolio stacks up against the quarter prior, view their previous holdings here as well as a prior investor letter here.

This is just one of the many recent hedge fund investor letters we've covered. Just last week, we covered Bill Ackman's Pershing Square investor letter as well as David Einhorn's Greenlight Capital investor letter. Stay tuned as we'll be covering numerous other hedge fund letters the rest of this week!

Those of you wishing to read Viking's latest letter can do so below via the embedded document. RSS & Email readers will have to come to the blog to view it. Alternatively, as long as this link works, you can try downloading the .pdf here.

Viking Q2 Letter

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