Whitney Tilson and Glenn Tongue's hedge fund T2 Partners has had some rough sledding the past few months, mainly due to its large short exposure. Over the last five months, it is down 4.3% net while the S&P 500 has rallied 23.5%. As such, they've re-examined their portfolio construction and have decided to reduce short exposure and get back to basics: Buying cheap stocks.
Rationale for Reducing Short Exposure
Tilson cites the fund's maintenance of a large short book after the crisis as the primary mistake. Additionally he writes:
Over time we've been quite successful shorting fads, frauds, promotions, declining businesses, and bad balance sheets. Where have had much less success, however, especially in recent months, is shorting good businesses that are growing rapidly, even when their valuations appear extreme. Such open-ended situations, regardless of valuation, are very dangerous, so going forward we will avoid them entirely unless we have a high degree of conviction about a specific, near-term catalyst.
The immediate thing that comes to mind is the fund's well-documented short position in Netflix (NASDAQ:NFLX). This short is obviously classified as a "valuation short" but T2 notes that it is still digesting the company's recent earnings as well as other channel checks ... and it is unclear as to whether or not it's adjusted its position anyway.
Sticking to T2's "back to basics" mantra, the fund has recently been adding to its positions in MSFT and BRK.A. You can see its analysis of Microsoft here and a summary of its other positions in its year-end letter here.
T2 Partners' January 2011 letter to investors can be found in our original post here.
Be sure to also check out a ton of other hedge fund letters we've posted recently:
- John Paulson's year-end letter to investors
- David Einhorn's Greenlight Capital letter
- Summary of Kleinheinz Capital's letter
- Dan Arbess & Xerion Fund's 2011 strategy