$3.7 BILLION HEDGE FUND: The best opportunities are lurking where we are doing the worst

Jason KarpLinkedInJason Karp, founder of Tourbillon Capital Partners.

Tourbillon Capital Partners, a $3.7 billion New York hedge fund manager, was one of the hottest new fund startups when it launched in 2013.

It’s not doing as well this year, and founder Jason Karp offered an explanation: low interest rates.

“This entire phenomenon is related to global rates and lack of return alternatives,” Karp wrote in his firm’s second quarter investor letter released last week, a copy of which was reviewed by Business Insider.

In other words, Karp is saying that market conditions are such that many hedge funds, including his own, are struggling to make money.

The average hedge fund has returned about 3% this year through July, according to data provider HFR. Tourbillon was down -12.9% over the same period.

Here’s more from the letter:

“With unprecedented zero and negative interest rate polices all over the globe (ZIRP and NIRP), investors are searching for substitutes for bonds that look stable, boring and have dividend yield. Financials have logically been the underperforming sector as they generally make higher margins with higher rates (net interest margin). However, sectors that typically have non-cyclical growth (health care, technology and discretionary) have dramatically underperformed….As a result, the sectors that worked in the first half of 2016 are not where hedge funds traditionally traffic, especially for [Tourbillon].

…As interest rates rise, the stock market on the whole often suffers — and that’s when active managers shine. As rates fall, the average outperformance of active funds declines, and indexing looks better.”

The letter also notes the strange nature of current stock performance, where cruddy companies are posting strong gains:

“Amazingly, the best performing quintile of stocks over the last 9-months have negative revenue growth! This has only happened three times since the 1950s. Imagine an analyst coming to you and pitching a group of longs that has negative revenue growth because they think the market will just keep inflating the multiple as the fundamentals deteriorate.”

Tourbillon’s flagship fund, which makes long and short bets on stocks, has fallen 12.9% through July, according to a person familiar with the matter. The fund was up 1.5% in the second quarter, according to the letter.

That’s following strong years previously: 10.8% last year, 10% in 2014 and 21% in 2013.

Tourbillon is a relatively young hedge fund, launched in January 2013 with just $250 million, according to Hedge Fund Intelligence. The firm swiftly raised assets as many of its competitors struggled to raise money. The firm oversaw $2.3 billion last year, and that figure has since grown to $3.7 billion. About $3.2 billion of that cash is in the firm’s flagship hedge fund.

Karp previously was a portfolio manager at Steve Cohen’s SAC Capital and co-CIO at and Carlson Capital. And despite headwinds this year, Karp is sticking to his strategy — saying that high-quality picks will eventually rise in value.

“What has caused most of our negative alpha on the long side in the last 9-months is precisely where the best opportunities are lurking,” he wrote in the letter. “In a low to no-growth world, we believe companies that can grow in spite of no natural GDP tailwinds will command a premium over time.”

One of Tourbillon’s top investments for the second quarter is Dish Networks, the letter said.

Tourbillon’s other best stock picks were Post Holdings, American Homes 4 Rent, Pfizer and AT&T. Its worst were three unnamed mid-cap shorts, Synchrony Financial, and Alexion Pharmaceuticals, a long investment.

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