August 17, 2011

Julian Robertson - Hedge Fund Management

Beginning
Julian Robertson is a fan of big cats. He has founded the funds: Tiger, Ocelot, Jaguar, Panther, and Puma. But everything began in 1932 when Julian Robertson was born in Salisbury, North Carolina, USA. When he was six years old, his father told him about successful investments, and he learned everything about how to interpret financial statements. He holds a business degree from the University of North Carolina. After finishing the degree, he was recruited to the Navy where he spent two years of his life.
   Julian Robertson worked the next 23 years at Wall Street. The reason why he moved to Wall Street was that his father had told him: "That's where the money is." In 1978, he quit, and moved to New Zealand to think things through about his life.
   At the same time, a new type of investment style was created: The limited partnership – or the hedge fund. Julian Robertson watched from New Zealand as the hedge fund managers George Soros and Michael Steinhardt made a lot of money from running their own hedge funds. So he moved back to Wall Street, at age 48, to launch the hedge fund Tiger Management in 1980.

On his own
Julian Robertson wasn't running everything by himself. The company worked as a school for future hedge fund managers. When his co-workers graduated from this "school," they were ready to create their own hedge funds. These co-workers who started their own companies were know as the Tiger Cubs.
    Julian Robertson said about great investors: "They are smart, honest, hard-working, and competitive. But they have also a desire to do good in the world." One example is Paul Tudor Jones who created the Robin Hood Foundation. Another example is Salem Abraham who gave away a lot of his profits to contribute to the town Canadian where he grew up. Julian Robertson started the Tiger Foundation in 1990. The goal of the foundation was to support non-profit organizations working to end poverty in New York.
    Tiger Management closed its doors in 2000, at the height of the Internet bubble. The earnings had up to then been 25 percent a year. Julian Robertson said how the stock valuations made no sense to him. But Julian Robertson stayed involved in the hedge fund industry by investing his own money. He also traded with his own money in his own portfolio. In 2008, that portfolio increased with 150 percent. Most of his money that year was made on macro trades – the art of chasing macroeconomic trends by buying and selling bonds and currencies.
    In the coming years, Julian Robertson believes that the US Dollar will become so weak that China and Japan are going to stop purchasing US Treasuries. This is because of the current spending, since the credit crisis of 2008, to stimulate the American economy. "I think what we're doing now will either fail, or it will result in unbelievably high inflation - and tragically, maybe both," he said. "That would mean a depression and explosive inflation, which is frightening.

Strategy
Julian Robertson was a stock picker above all. "We have never felt compelled to be in macro," he said. He tried different methods when he had just founded Tiger Management, but got hit hard by the crash of 1987, and returned to the core strength of picking stocks. Julian Robertson always searched for a steady flow of good ideas rather than a few home runs.
    Having co-workers is one reason behind the success. Julian Robertson said about the investor Peter Lynch: "Peter missed one thing: He wasn't having fun. He didn't get people to help him." Peter Lynch preferred to do everything by himself. Julian Robertson's co-workers contributed heavily to the investment process, but Julian Robertson always had the ultimate veto power over what went into the portfolio.
    You should search for little-noticed out-performers. These are strong companies, well positioned in their markets, and likely to stay on top. The key is to bet for good companies and against the lemons. You hedge one industry against another – long oil refineries and short airlines, where an expected event should benefit one and hurt another.
    In total, Julian Robertson had six main themes to find new stocks:
  1. Wonderful Management. Look for managers who make tough decisions and have the ability to execute them.
  2. Monopoly or Oligopoly. Find companies that dominate their industries. For example, Julian Robertson bought Wal-Mart, and as part of the strategy, he also shorted Wal-Mart's smaller and higher-cost competitors.
  3. Great value based on careful examination of the company books.
  4. Regulation. Identify companies that can be expected to succeed because of a favorable regulatory environment.
  5. Upstream needs. Look for the companies that will supply the whole growing industry.
  6. Growth.
    When one has found a good stock, make sure to buy a big position. Julian Robertson was always heavy in large companies with a solid track record. Most of the time, eight to ten big positions gave him most of his profits. Also, he held many positions to contain the risk from a particular event. The net long exposure of Tiger Management used to fluctuate between 20 and 40 percent. The fund was generally leveraged 2.5 times its assets.
    Julian Robertson also focused on global developments. For example, he caught the rise of the German stock market after the fall of the Berlin Wall. He took breaks – up to eight weeks a year. These were not real vacations, since he studied the countries he visited and their companies. To control the risks, Julian Robertson used a stress test that consisted of what would happen after a 10 percent loss in every holding.

Conclusions
  • Co-workers can be useful when trading or investing. Peter Lynch did everything by himself, but that's not always fun.
  • It's possible to teach trading to others. Julian Robertson taught the Tiger Cubs. Another example is Richard Dennis and William Eckhardt who taught the Turtles.
  • One can research trading opportunities and have a vacation at the same time.    

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