Tiger Cub funds hit in tech-led stock slide

Will hedge fund history repeat itself, or will it rhyme? In the late 1990s, as technology shares surged ever higher, one of the world's most renowned hedge fund managers was distraught.

Julian Robertson, a former US Navy officer who had built his Tiger Management into a $20bn juggernaut, was convinced that these newly fashionable internet companies were dangerously overvalued, and told his investors he refused to touch them.

But Mr Robertson, who had built around him a crack squadron of so-called "Tiger Cub" stock picking protegees, was losing ever more money, and his clients had begun to lose faith, pulling billions of dollars from Tiger by the end of 1999.

By March 2000, less than a year before the bubble he had been warning against spectacularly burst, a broken Mr Robertson decided to close Tiger down for good. The Tiger Cub traders he trained went on to found many of the world's largest and most successful hedge funds.

Now, as many investors ponder whether markets are in the grip of a second technology bubble, the Cubs, it seems, are determined not to make the same mistake that led to their mentor's demise.

As investors debate whether markets are in the grip of a second technology bubble Tiger Cub hedge funds have piled in to loftily valued US technology shares such as Facebook, Amazon and Tesla Motors. And, last month, as many of these names that had performed so strongly over last year began to fall, these hedge funds suffered heavy losses.

"March was a wake-up call from the market to many long-short funds that had been relying on certain stocks and sectors for the past couple of months," says Matthew Elstrop, an analyst at Liongate Capital Management, a fund of hedge funds with $7bn of assets invested in the sector. "A lot of crowded trades, such as high growth tech stocks, just went into reversal."

It was a particularly painful month for Coatue Management, run by Tiger Cub Philippe Laffont, which saw its flagship fund fall by 8.7 per cent as bets in tech stocks that had surged over the past year - such as Tesla Motors, Netflix and Pandora - went awry. Mr Laffont ended the month by returning $2bn of the $7bn fund to investors.

Others of the most successful Tiger Cub funds, such as Stephen Mandal's Lone Pine and Andreas Halvorsen's Viking, were holders of many of the technology shares that suffered in March, while Rob Citrone's Discovery Capital Management was forced to hold a conference call with its investors to explain its losses.

All in all, the Tiger Cubs, which represent about 49 hedge funds in total, suffered their third-worst overall month in March since the crisis, according to one investor who tracks their performance, with only September 2008 and September 2011 having seen sharper falls.

Other hedge fund managers argue that part of the explanation for the Tiger Cubs' poor performance may have been due to how difficult indiscriminately rising equity markets have made it for specialised stock pickers.

So-called long-short hedge fund managers, who focus on picking out a small selection of companies and making bets that their share prices will either rise or fall, have been squeezed as all shares have gone up more or less as one. As such, many of the Cubs have tended to concentrate on a number of momentum trades that become ever riskier if sentiment begins to turn.

"There has been growing consensus positioning and crowding of certain trades among specialised stock pickers, and that has hurt people," says Alper Ince, who is responsible for selecting long/short equity hedge funds at the investor Paamco.

At the same time March was not only tumultuous for technology-heavy hedge funds. Well known non-Cub managers that held no technology shares suffered.

John Paulson, the hedge fund manager who built his reputation betting heavily against the US housing bubble before the crisis, saw his $2.8bn Advantage Plus fund, which is focused on so-called event driven trading, drop by 7.4 per cent in March.

In the UK, Lansdowne Partners' $1.6bn Global Financials fund was down by 5 per cent in March, taking its loss for the year to date to 3 per cent. In 2013, it had posted a 23 per cent rise.

Yet, while the Tiger Cubs and other hedge funds have been bloodied by March, it is not clear, as US technology shares continue to fall, if they will start to dump them or keep faith with the shares that have served them so well last year.

Research from Morgan Stanley's prime brokerage suggests that few hedge funds have started to offload their so-called "new tech" share holdings yet, although that may change if these companies continue to fall in value.

"So far we haven't seen big changes in hedge fund positions," says Mr Ince. "In fact, they may actually like some of the technology shares even more now they are cheaper."

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