In-depth look under the hood of Hound Partners

In-depth look under the hood of Hound Partners

Introduction

In 2004 Jonathan Auerbach struck a deal with Tiger Management and secured their blessing and a check from Julian Robertson to start his own venture. He named the newly formed vehicle Hound Partners with his then-partner Scott McLellan, who in 2007 launched his own fund Marble Arch . There is no doubt that Auerbach has since earned his stripes. Currently, Hound ranks as the second largest Tiger Seed (those managers seeded by Tiger Management), with close to $5B in publicly filed market value.

Early last year Auerback launched his long-only fund, following in the footsteps of his Tiger brethren. The analysis in this post is very relevant to that fund in particular since it primarily speaks to skills and portfolio characteristics on the long side.

As usual for our Manager Mondays, everything mentioned in this post is sourced exclusively from public data, including the manager’s profile, simulated performance and all other analysis and commentary. The data used here omits the short side, non-equity securities, many non-US securities and all non-public information such as actual fund performance.

Having said all that, we present a detailed look underneath the hood of this highly successful manager with the detail and rigor we’re certain you haven’t seen before.

Performance

First, let’s take a look at the simulated performance of Hound’s long book.

Hound outperformed the general markets by a wide margin, with the majority of that outperformance occurring since 2011. In fact, since 2011 the long book has returned 182% compared to 80% for the S&P 500. The data also bodes well for the timing of the long-only fund that launched in January 2014. Since then, the long book returned 46% compared to 22% for the market.

As expected, the outperformance has a steady profile if viewed on a rolling 12-month basis. The manager outperforms by a moderate margin over long, multi-year periods. This is characteristic of a long-term fundamental long/short equity strategy versus a strategy that outperforms massively over short periods [KK1]  ( Example ).

Asset Growth

With good performance, asset growth often follows, and this clearly has been the case with Hound. Reported market value ballooned from just $432M in January 2011 to nearly $5B today. 

What does this asset growth mean? In an earlier study we found that managers have three main levers to deal with large asset growth. The main finding was that AUM growth often leads to increased average market capitalization in manager portfolios, increased position counts, or declines in liquidity. It can also be a combination of any of those three phenomena.  

Let’s test some assumptions on how asset growth affected Hound’s portfolio, starting with position count and concentration. We might assume that Hound put a lot of the new money to work in new positions thereby decreasing overall concentration of the portfolio. The data shows quite the opposite. Position count dropped dramatically post crisis and has remained low since.