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Robert Abbott
Robert Abbott
Articles (253)  | Author's Website |

Whitney Tilson Turns From Investing to Teaching

A once high-flying hedge fund manager recognizes his mistakes and now hopes to help others avoid the pitfalls

January 10, 2018

“You must have the patience and conviction to stick with what is, by definition, an unpopular bet.” -Whitney Tilson

Whitney Tilson (Trades, Portfolio), a hedge fund guru, is calling it quits. The manager of T2 Partners and Kase Capital, who won plaudits in the 2000s but struggled since, shut down his firm in September 2017.

With candour, Tilson admits he made many mistakes, but the 51-year-old says he still has the entrepreneurial drive. So he is now going to teach would-be hedge fund managers what to do—and what not to do.

Who is Tilson?

Born in 1966, Tilson graduated from Harvard College with a bachelor’s degree in government, and from Harvard Business School with an MBA in 1994. He spent much of his youth in Tanzania and Nicaragua with his parents, who were educators and members of the Peace Corps.

Before entering the investment industry, he worked for five years with Harvard’s Michael Porter, who was studying the competitiveness of inner cities and inner city-based companies. Out of this, he became executive director of the Initiative for a Competitive Inner City organization. He was also a founding member of Teach for America and has long been involved in education reform. He also worked at the Boston Consulting Group.

Tilson entered the investment business in 1999 and, according to InsiderMonkey, launched T2 Partners with Glenn Tongue (a long-time partner who amicably left in 2012 to start his own firm, Deerhaven Capital Management). Kase Capital Management, formed in 2004, succeeded T2 as the umbrella company when Tongue left.

While operating his business, he also co-authored three books, including one with Charlie Munger (Trades, Portfolio), wrote for numerous financial publications and was a CNBC contributor. He is also the co-founder, chairman and co-editor-in-chief of Value Investing Congress, which began in 2004.

This past September, Tilson announced he was shutting down Kase and returning capital to investors. That decision was driven by poor results; Tilson said in his email to investors, “Reporting sustained underperformance to you was making me miserable…. I couldn’t in good conscience continue to manage your money unless I had a high degree of confidence that I could turn things around within a reasonable time frame.”

At the time of the message, assets had shrunk to about $50 million. With the closure of Kase, Tilson said he expects to serve on corporate boards, do consulting and mentor young investors.

He has started on the latter. In a letter dated Dec. 23, he announced he now is offering three-day hedge fund bootcamps. He says he initially considered general investing, but on further reflection realized that he, uniquely, could teach hedge fund entrepreneurship. As he says in the letter, “I did so many things right as I built my firm.... And then I screwed it up and pretty much lost it all.”

What is T2 and Kase?

Based in New York City, T2 Partners was an investment advisory firm, supplanted by Kase Capital after Tilson and Tongue split in 2012.

In its latest (and perhaps last) Form ADV Part 2A filing, Kase describes itself as a discretionary investment advisor to private investment funds, serving mainly high-net-worth individuals and institutional investors.

Kase operated three private funds:

  • The Kase Fund managed a concentrated portfolio for “an extended period of time,” with the aim of long-term capital appreciation and minimal risk.
  • Kase Qualified had the objective of long-term, after-tax capital appreciation, with moderate risk. It uses a concentrated portfolio of U.S. stocks.
  • Tilson Offshore Fund was based in the Cayman Islands with the goal of long-term capital appreciation, managing a concentrated portfolio of U.S. stocks. It was offered to non-U.S. investors.

It also reported managing $69.6 million of discretionary assets under management as of Dec. 31, 2016.

Strategy

Tilson sums up his strategy by saying his funds try to buy shares at prices that are selling at a steep discount to intrinsic value. Further, the discount should be enough to mitigate the risk of capital loss and provide upside potential. In his Kase Learning letter, he essentially calls himself a disciple of Warren Buffett (Trades, Portfolio) and Charlie Munger (Trades, Portfolio), and says his bootcamp will also discuss other gurus he admires, including Bill Ackman (Trades, Portfolio), Joel Greenblatt (Trades, Portfolio) and Tom Russo (Trades, Portfolio).

But was walking in the footsteps of these gurus the right thing for Tilson to do? In a ZeroHedge article, Tyler Durden says Tilson was “the consummate, if always late immitator [sic] of other prominent investors especially Warren Buffett and Bill Ackman .”

In a 2012 Business Insider article, Joe Weisenthal headed his piece this way, “Whitney Tilson’s Kamikaze Investment Strategy.” The writer says, “...he'd [Tilson] go long deep value broken names and go short the hottest momentum names.... That meant wild swings when momentum names ignored their overvaluation and kept moving against him, or when some beaten down name suddenly surged.”

Perhaps Tilson felt the same way; in early 2013 he announced he planned to get back to basics. In his annual letter to clients, Tilson said less is more and that he would concentrate on his very best and well-researched ideas. He would target 80% - 100% long and 15% to 30% short.

However, he was not optimistic. “In today’s markets, complacency abounds — market volatility levels haven’t been this low since before the financial crisis in early 2007 — so high-conviction long ideas are few and far between right now,” he said. Unfortunately, he was proven right.

Strategically, or philosophically, it seems both Tilson’s comments and those of his critics suggest a lack of focus. While both Buffett and Ackman are value investors, there are many outright differences. Even between Buffett and Munger there are important nuances that demand hard choices.

Holdings

With the closure of the firm in September, all holdings have now been closed, except for those held personally by Tilson.

Performance

According to InsiderMonkey, from inception to the end of calendar year 2015, T2 Partners delivered 177.1% cumulative returns versus the S&P 500’s 36.4% return.

Of course, the big positive returns occurred in the early years, while performance since the financial crisis has lagged. Wikipedia provides this table of returns generated since 2010:

Whitney Tilson performance

Outsized returns before the financial crisis to uneven or simply bad returns after the crisis is a relatively common theme among hedge fund managers. Tilson falls into this camp, but to his credit has acknowledged his underperformance.

Conclusion

While underperformance marked the second half of his investing career, Tilson did have many successes in the first half and shared his knowledge with readers and listeners.

His career also shows the boundaries of consistency and adaptability. His following of too many gurus likely contributed to his underperformance, but so did failure to adapt to the post-2008 investing world.

All of that is easy to say in hindsight, of course. But it helps remind other investors of the need to have a robust long-term philosophy, as Buffett has, or to know when the markets are shifting in a profound way. That, no doubt, separates true gurus from we mere mortals.

Perhaps Tilson’s hedge fund bootcamps will help future generations of investors appreciate and manage such distinctions.

Disclosure: I do not own shares in any companies listed, and I do not expect to buy any in the next 72 hours.

About the author:

Robert Abbott
Robert F. Abbott has been investing his family’s accounts since 1995, and in 2010 added options, mainly covered calls and collars with long stocks.

He is a freelance writer, and his projects include a website that provides information for new and intermediate level mutual fund investors (whatisamutualfund.com).

As a writer and publisher, Abbott also explores how the middle class has come to own big business through pension funds and mutual funds, what management guru Peter Drucker called the Unseen Revolution. In Big Macs & Our Pensions: Who Gets McDonald's Profits?, he looks at the ownership of McDonald’s and what that means for middle class retirement income.

In an eclectic career, Robert Abbott was a radio news writer and announcer, a newsletter writer and publisher, a farmer, a telephone operator, and a construction worker. When not working, he has been a busy volunteer, which includes more than a decade of leadership roles at the Airdrie Festival of Lights, one of North America’s leading holiday light displays. He lives in Airdrie, Alberta, Canada.

Visit Robert Abbott's Website


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Comments

asawhney
Asawhney - 5 months ago    Report SPAM

Mr 2/20 can't beat even s&p 500----------vehicle to accumulate money for your own family not for the investors.

Buy S& P 500 and be average--there is no theory out ther these people know.

Follow Buffet-buy BRK B , even now.

Robert Abbott
Robert Abbott premium member - 5 months ago
Thanks for your thoughts, Awawhney! My next article will address Warren Buffett (Trades, Portfolio)'s bet with a hedge fund.

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