The World's Most Profitable Hedge Fund?
According to LCH Investments’ annual ranking of the 20 most successful hedge funds of all time, TCI Fund Management generated $8.4 billion of net gains last year. That’s more than the after-expense trading profits of Ray Dalio’s Bridgewaer Associates, David Tepper’s Appaloosa Management, Ken Griffin’s Citadel, or Steve Cohen’s Point72 Asset Management.I recently covered the best and worst hedge funds of 2019 and gave the top spot to Ken Griffin's Citadel. I now stand (somewhat) corrected, Chris Hohn’s TCI Fund Management gained 41% last year, trouncing the average hedge fund return (10%) and even beating the S&P 500 which posted a total return of 31% last year.
Hohn has definitely entered the elite of the hedge fund game. His firm now manages $30 billion, making it one of the industry’s biggest, and its main hedge fund posted strong performance in 2019, when it returned 41% and crushed the average hedge fund, which returned 10.35%, data provider HFR says.
Based in London, Hohn is known for his activist investments, where he shakes up boards and management of companies in which he owns shares. Last year, during which the U.S. stock market returned 31.5%, he benefited from being generally long equities, but big positions in Moody’s, Microsoft and Charter Communications, juiced his returns.
While many prominent hedge fund managers have struggled over the last decade, Hohn has consistently scored good returns. His hedge fund has now produced $22.8 billion of net gains since its 2004 inception, making Hohn the 14th greatest hedge fund manager ever, according to LCH Investments, which ranks hedge fund managers based on the absolute total dollar amounts they produce, not their annualized percentage returns. Hohn first got on the list two years ago, then dropped off for a year after his hedge fund dipped in the red in 2018, a year in which it still beat the U.S. stock market and the average hedge fund manager.
Last year, Hohn took his corporate activism in a new direction due to his concerns over climate change, saying he would put pressure on corporate boards of companies that did not disclose their carbon dioxide emissions.
Ray Dalio’s Bridgewater Associates, the world’s biggest hedge fund firm, tops the LCH list because its strong historic track record was compounding a huge assets base. It manages about $131.9 billion of hedge fund assets and has made $58.5 billion since inception, according to LCH. It made $600 million trading financial markets in 2019, says LCH.
Admittedly, I'm not too familiar with Chris Hohn or TCI Fund Management, but going forward I added his fund to my list of top funds to track.
Still, I caution my readers not to read too much into these articles on top hedge funds. TCI Fund Management is an activist fund which basically manages a $30 billion concentrated portfolio of 15 stocks:
When you're running billions in a long-only concentrated portfolio like that and the beta winds are blowing your way, well, if you're lucky, it's not hard to beat the S&P 500.
But if you look at Hohn's long-term performance, that's where things get interesting because he has consistently delivered great results and his investors have profited greatly over the years. That's not something a lot of hedge funds can boast about.
In fact, Chris Hohn's TCI Fund Management and Stephen Mandel's Lone Pine Capital led hedge fund gains last year, respectively returning $8.4 billion and $7.3 billion to clients in 2019.
Still, I'm not going to lie, activist funds and L/S funds make me nervous, I've seen plenty of superstars get killed over the years or run into serious trouble. Lest we all forget, legendary value investor Bill Miller beat the S&P 500 for 15 years in a row (through 2005) before running into a very cold streak where he underperformed for years and still hasn't recovered.
As I stated in my comment on the best and worst hedge funds of 2019, central banks have made beta great again and clearly large investors prefer private equity funds over the long run and for good reason, they'll take that illiquidity risk for better alignment of interests and better long-term returns.
We have had one giant beta party since 2009 as the world discovered the virtues of passive investing (indexing) and central banks discovered the virtues of QE infinity.
Ron Mock, OTPP's former CEO, once told me back in 2002: "beta is cheap, you can swap into any index for a few basis points to get beta. Real alpha is worth paying for."
What he didn't tell me back then was beta can also be dangerous because when the winds aren't blowing your way, beta has the exact opposite effect of what you need as a long-term investor.
Right now, we are living in Betaland, a wonderful magical world where everybody is indexed and stocks only go up no thanks to central banks adopting unorthodox monetary policies where they basically hand out billions to banks and big hedge funds to speculate on risk assets.
No wonder top hedge funds are seeing their biggest gains in over a decade, they're direct benefactors of these unconventional policies which promote excessive risk-taking behavior.
Notice I emphasize top hedge funds because average hedge funds are dying at a very fast rate, most of them go out of business within three years of starting up.
Anyway, back to Chris Hohn and TCI Fund Management. It seems like the world's most-profitable hedge fund manager is also a climate radical:
The hedge fund industry has no shortage of aggressive, in-your-face players, but few are as tough as Chris Hohn. The British billionaire takes the typical playbook to new levels—scuttling deals, pushing to remove bosses, and battering companies with litigation and threats. One opponent was so peeved after losing a boardroom battle with Hohn that he titled a book about the experience Invasion of the Locusts. That approach made Hohn’s TCI Fund Management the world’s best-performing, large hedge fund last year.I actually applaud Chris Hohn's mission to be the hedge fund industry's "warrior against climate change" now that Farallon Capital Management's founder turned Democratic billionaire presidential contender, Tom Steyer, has moved on from the hedge fund industry.
Now Hohn is bringing his hardball tactics to the fight against global warming. The money manager, with US$30 billion in assets, is pushing portfolio companies to dramatically reduce greenhouse gas emissions and disclose their carbon footprint. If they don’t, he says he’ll oust their boards or dump their shares. Just in case anyone doubts his commitment, last fall Hohn and his charity donated £200,000 (US$260,000) to Extinction Rebellion, the radical climate change movement whose members have blocked traffic in London and glued themselves to jetliners.
“In the war against fossil fuels, you can’t be super-picky about your allies,” says Jeremy Grantham, co-founder of Boston money manager GMO, a legendary investor who has long warned of climate catastrophe. Hohn “has shown you can make a big impact on companies with a lot of arm-twisting.”
For Hohn, 53, a cerebral and deeply private financier who’s worth $2 billion, his campaign is just a first step in shaking up an asset management industry he says has ignored a planetary crisis. He’s calling on investors to fire money managers who don’t press companies to reduce their carbon footprint, and he wants banks to stop lending to companies that ignore climate change.
Still, for all of Hohn’s zeal, his crusade is fraught with the inconsistencies of green investing. TCI once held a big stake in an Indian coal producer; even now, it owns shares in three railroads that burn tons of diesel and ship fossil fuels, including from oil sands, one of the worst sources of greenhouse gases. Another key holding: Ferrovial SA, the Madrid-based conglomerate that runs airports that include London’s Heathrow.
“On the one hand, he’s trying to be green—and on the other, he makes money out of polluters,” says Jacob Schmidt, chief executive officer of Schmidt Research Partners, a London investment firm. “The question is, how committed are you in actually following your principles?”
Hohn says it’s far more productive to engage with carbon-heavy companies than to ignore them. On Nov. 30, TCI sent letters to the CEOs of the 17 companies in his portfolio with specific instructions on shortcomings that must be fixed. TCI said it will vote against directors of companies that don’t hit its targets, as well as auditors who fail to report “material climate risks,” and it may even sell all its shares in a company.
In a letter to Ferrovial, Hohn acknowledged that “de-carbonizing” airports is a massive challenge and lauded the company’s A grade for disclosing its greenhouse gas emissions. Yet TCI said Ferrovial’s target of cutting emissions almost a third by 2030 could be increased, and he called on the company to support measures such as a carbon tax and a mandate that airlines shift to greener jet fuel.
He told Canadian Pacific Railway Ltd. that its method of disclosing emissions got a C grade by the nonprofit Carbon Disclosure Project, and that its plan to boost that to a B would still be “unsatisfactory.” TCI, the railroad’s No. 1 stockholder, with an 8 per cent stake, said it requires the company to have a “credible, publicly-disclosed plan” to reduce emissions that meets seven objectives, including offsetting emissions from corporate travel and making facilities more energy efficient. Canadian Pacific says it engages in dialogue with stockholders on topics including sustainability, and that it has long reported its emissions to improve its practices. Hohn declined to be interviewed for this story.
Emotional Makeup
Hohn launched TCI and an affiliated charity, the Children’s Investment Fund Foundation, in 2004 after earning a reputation as a gifted stockpicker in the London office of Perry Capital, a New York-based hedge fund. His wife, Jamie Cooper, whom Hohn met at Harvard in the early ‘90s, ran the foundation, and they became a London power couple as TCI pumped money into the charity.
Thanks to Hohn, the foundation has $5.1 billion that it uses to fund programs such as strengthening nutrition for youngsters in deprived communities, protecting adolescents from slavery and human trafficking, and expanding pediatric HIV treatment in Africa. Hohn and Cooper regularly traded notes with Bill and Melinda Gates, and in 2012, David Cameron, then Britain’s prime minister, invited Hohn to speak at a summit on malnutrition at No. 10 Downing Street.
At TCI, the vibe was decidedly more mercenary. Hohn developed an investment strategy predicated on his own “personal, intellectual, and emotional makeup,” as he put it to Justice Jennifer Roberts, who presided over his 2014 divorce, which resulted in a £337 million settlement for Cooper. Hohn’s approach meant conducting meticulous analysis and searching for weak management teams that other investors avoid. “Think of it like the damaged goods department of a department store where you can get 80 to 90 per cent off because most people won’t buy,” Hohn said in a video interview with Institutional Investor magazine in 2013.
When he settles on a target, Hohn takes highly concentrated stakes; a single stock can account for more than 15% of his portfolio. Then he goes to work agitating for changes in the company’s strategy. In 2005, he took a sizable stake in Deutsche Boerse in Frankfurt to stop what he called a “value-destructive acquisition” of the London Stock Exchange. Rebuffed, he called on shareholders to remove CEO Werner Seifert and kill the deal. The board acquiesced, and after Seifert left the company, he characterized Hohn and other shareholder activists as locusts.
Hohn was the catalyst for one of the most disastrous banking deals in memory. In 2007, TCI bought 1% of ABN Amro and started calling for a sale of the Dutch lender. After stockholders supported TCI, ABN Amro was sold to a consortium led by Royal Bank of Scotland Group in the biggest European banking merger ever. TCI pocketed $1 billion, but the global financial crash of 2008 poleaxed the newly combined institution and led to its nationalization by the British government.
TCI has also exploited scandals such as the 2011 crisis at Rupert Murdoch’s News Corp. The company’s U.K. newspapers had hacked mobile telephones and voice mail accounts of celebrities, royals, and a murdered 13-year-old girl. As the media giant’s stock plunged, Hohn purchased almost $1 billion in shares. After News Corp. settled lawsuits in the affair, Murdoch bought back shares and broke up the company. The stock rallied over the next two years, earning a 57 per cent return for TCI—and, for Hohn, reinforcing his reputation as a gifted money manager.
Yet he has suffered defeats that show the limitations of his activism. In 2012, TCI sought to force Coal India, a state-controlled producer, to boost dividends and stop selling super-cheap coal to nearby power plants. But the government had little interest in seeing energy prices rise; in 2014, TCI gave up and bailed out of the stock, which had fallen 19% during the campaign. Four years later, the London Stock Exchange Group Plc spurned Hohn’s demands to oust its chairman and renew the CEO’s contract. After that effort was rebuffed, TCI sold most of its 5% stake in the company, only to see its shares almost double the following year.
Value vs. “Values"
Hohn is rolling out his green efforts as the asset management industry struggles to find a way to address climate change while delivering the kind of returns investors demand. Index fund giants have long used an investing style dubbed ESG—based on environmental, social, and governance criteria—but they maintain that investment stewardship is ultimately about maximizing value, not imposing social “values” on companies.
But amid mounting anxiety about record-breaking global temperatures, Larry Fink, chief executive officer of BlackRock Inc., acknowledged on Jan. 14 that climate change has become a “defining factor” in the long-term prospects of companies worldwide. BlackRock, the world’s biggest investment firm, with $7.4 trillion in assets, will start cashing out of firms with “high sustainability-related risk” and plans to make emissions a fundamental consideration in investments.
Tackling global warming will test Hohn’s approach as never before. First, he’s betting that companies will heed his demands, and then that he won’t dampen returns by destabilizing companies that reject them. In tying TCI’s fortunes to a climate change agenda, Hohn is wagering that the economic risks from the mounting crisis are so great that it would be foolish not to spur companies to get real on emissions.
“Green investing and hedge funds are not terms many investors would put in the same sentence,” says Marc de Kloe, a partner at Theta Capital Management in Amsterdam and an investor in TCI’s fund. “However, we have been proponents of the idea that hedge funds are in some way best suited to implement strong green policies, given their unconstrained nature and ability to deploy activist tactics.”
Climate change activists say it’s about time, given the confusion around ESG, which has become a megatrend in the investing world. More than $30 trillion was held in assets classified as sustainable or green in 2018, up more than a third from 2016, according to the Global Sustainable Investment Alliance, a group that tracks money flows.
But critics contend that ESG is often little more than a public relations gimmick to “greenwash” a firm’s credentials. There’s no standard definition of ESG, so it’s virtually impossible to compare companies against a universal benchmark. Moreover, subscribing to the approach doesn’t mean institutional investors will actually pressure portfolio companies to reduce emissions. In November, ShareAction, an advocacy group in London, released a study finding that Capital Group, T. Rowe Price, and BlackRock supported fewer than 7 per cent of the shareholder resolutions on climate risks in 2017 and 2018, even though they all subscribe to ESG.
While it might be odd to look to hedge funds for support in the fight against climate change, that’s where the story is going, says Catherine Howarth, CEO of ShareAction. “Historically, large institutional investors have encouraged companies to do the right thing in vague, bland terms, and the whole asset management field is finally waking up,” Howarth says. “Now we need activist investors like Chris Hohn to push like crazy for what they want.”
In his heyday, Steyer was running one of the best multistrategy hedge funds in the world (it still is but nowhere near as great), on par, if not better than Citadel and SAC Capital.
Unlike Steyer, however, Hohn seems a lot more practical choosing to engage fossil fuel companies instead of divesting from them.
And to be sure, Hohn puts his money where his mouth is and if you go to TCI Fund Management's website, you will see a whole ESG section where they elaborate their engagement with portfolio companies, outlining specific steps to get better emissions disclosure and steps to achieve carbon neutrality.
One high profile example is Microsoft which recently announced it is aiming to become carbon negative by 2030. Did Chris Hohn have a say in this? No doubt he spoke with Microsoft CEO Satya Nadella and perhaps even its founder, Bill Gates.
But I can't help feel like there is some gimmickry going on as ESG is very popular among young millennials and it's certainly popular in the investment world. Part of this is because ESG is proven to deliver great long-term rewards, but part of it is political sensationalism which makes me feel a bit uneasy.
And even smart people say things that make me wonder sometimes. For example, before he retired, Ron Mock told me Brussels Airport became 'carbon neutral' but airports by their very nature will never be carbon neutral because airplanes are among the worst polluting man-made machines on earth.
All those billionaires, rock stars and Hollywood A-listers flying to Davos in their private jets are among the biggest polluters on earth but we give them a free pass because they're billionaires and celebrities that can presumably influence climate change policy for the better.
Anyway, I'm still struggling with ESG investing, not because I don't believe in it and its outcomes, I do, but because I think there are a lot of inconsistencies that have yet to be ironed out and political extremism seems to often take over, making sensible debates next to impossible.
Who knows, maybe Chris Hohn will follow Tom Steyer into the political arena one day and successfully occupy No. 10 Downing Street. There he will undoubtedly have a lot more influence over climate change.
As far as the hedge fund industry and which are the top hedge funds, I stand by my comments, right now I put Citadel ahead of the pack in terms of delivering great risk-adjusted alpha in all market environments, but there's no doubt, TCI Fund Management was the world's most profitable hedge fund last year and it has also delivered great returns over the years taking very concentrated long-only positions.
Below, hedge funds made $178 billion for clients in 2019, but you still would have made a lot more money if you had just invested in a very cheap index fund. Bloomberg’s Dani Burger explains on “Bloomberg Markets: European Open.”
More interestingly, Bob Prince, co-CIO at Bridgewater Associates, discusses the end of the boom-bust cycle, finding opportunity in market stability, and the firm’s investment strategy. He speaks at the World Economic Forum’s annual meeting in Davos, Switzerland on "Bloomberg Surveillance".
Take the time to listen to the prince of Bridgewater, he's not only a smart guy, he's very nice and has played a crtical role in that organization's long-term success.
Comments
Post a Comment