Hedge fund legend Julian Robertson (Trades, Portfolio) passed away at the age of 90 on Aug 23. He was considered one of the three pioneers of the hedge fund industry along with George Soros (Trades, Portfolio) and Michael Steinhardt, who really institutionalized and popularized the investment model. Indeed, according to the excellent book, "More Money Than God: Hedge Funds and the Making of a New Elite"by Sebastian Mallaby, Robertson even used to eat lunch with the founding father of the hedge fund industry, A. W. Jones, when he was a stockbroker with Kidder, Peabody & Co. in the 1970s.
The famed short-seller Jim Chanos (Trades, Portfolio), who managed money for Soros, Steinhardt and Robertson, said of him: “I knew that he knew stocks better than anyone.”
Robertson launched Tiger Management at the age of 48. He was faithful to the Jones model of long-short and his strategy was pure stock selection.
Between its inception in May 1980 and its peak in August 1998, Tiger earned an average of 31.7% per year after subtracting fees, smashing the 12.7% annual return of the Standard & Poor's 500 Index.
There were two very interesting traits to Robertson and Tiger Management. First was its style of portfolio management and second was its hiring process, which led to the creation of dozens of market-beating "Tiger Cubs" (alumni of Tiger Management) and "Tiger Seeds" (hedge funds seeded by Robertson after his shutting of Tiger Magement).
Unlike most investors, Tiger Management took a long term view. Successful hedge funds tend to play in the very short-term trading horizon, or the long-term horizon where big gains can be made. According to Mallaby, Robertson’s ideal investment was something that looked like it would double within three years. If the guru believed he had found such an investment, he was willing to hang on, gritting his teeth through the hard times until the world caught up with his analysis.
This long-term approach was centered on the in-depth research of companies Tiger’s analysts would do. Information needed to be primary, not secondary, and this was gained by talking to customers and competitors to gain extra insight. Robertson’s long-short strategy was built on the idea to find the best 20 stocks to buy and the worst 20 stocks to bet against by short selling.
According to Mallaby, Robertson thought:
"A Tiger should manage the portfolio aggressively, removing good companies to make room for better ones; he should avoid risking more than 5 percent of capital on one bet; and he should keep swinging through bad times until his luck returned to him."
Robertson’s aim as a stock picker was to look through the price of a company as announced by the market and to ascertain its true value. This process often led him to buy stocks that were also attractive to takeover artists, which helped his performance in the takeover boom of the 1980s.
Unlike many investors, Robertson was an extrovert and used his personality and charm to gain insight from anywhere possible. For example, he knew very well that Wall Street analysts had a bias toward buy ratings so he would say to them, “I know you all consider these companies to be your children, but just call me with your least favorite child.”
This was not insider trading. Robertson’s contacts, from industry, government and finance, were offering broad guidance, not secrets on upcoming earnings announcements that could have immediate impact on stocks. His brilliance was that he was consciously building his network and cashing in on it. When an analyst pitched him an idea, he would test it against the most relevant people in his book of contacts. Also, Robertson was temperamentally a skeptic and short selling came naturally to him.
Robertson's evolution from a value stock-picking hedge fund manager to global macro manager began in the mid-1980s as Tiger’s assets began to grow rapidly. But this only happened because the fund became so large that it had to enter more liquid markets to allocate capital. However, according to Mallaby, Robertson wrote to his investors that “Soros' grasp of macroeconomics is in another league from mine.”
The second thing Robertson was famous for was his hiring. He brought in a psychiatrist, Dr. Aaron Stern, to help with the hiring process. Stern designed a test for applicants consisting of about 450 questions and lasting over three hours. According to Daniel Strachman’s book, "Julian Robertson (Trades, Portfolio): A Tiger in a Land of Bulls and Bears," they were looking for people with the following characteristics:
- Smart, bright, and quick with functional intelligence.
- Strong sense of ethics.
- Background in sports and interest in physical fitness.
- Interest in charity and public welfare.
- Sense of humor and fun to be around.
- Good resume.
This obsession with hiring people with the traits they thought needed to be a brilliant analyst clearly worked, as there are dozens of outperforming hedge funds being run by Tiger alumni.
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