Tiger Global Management, one of the largest and most successful hedge funds over the last decade, is in the news because of severe losses. Chase Coleman is a Tiger Cub, the name given to the protégés of Julian Robertson, the famous macro fund manager from the 1990s.
Anyone who says the losses were unpredictable is either ignorant or a shill for the hedge fund industry and asset management. You do not care about remote risks.
Were the losses predictable at Tiger Global Management?
Why were the losses predictable? Over a long period, it is impossible to keep the market gains you have accumulated without adequate risk mitigation. Why? Deviations of a large magnitude eventually occur, and only one of them can destroy years or even decades of returns. Remember the banks and the financial crisis in 2008? They lost all the money they made over the last century.
Unless you do not have access to the internet or a computer, it is impossible not to notice that large deviations wipe out unprepared investors, and just because you survived one risky event does not mean you will survive the next one. It is rare to go much longer than ten years without a crisis that forces a deleveraging from unprepared investors.
It is fair to say that without an adequate plan to mitigate the losses that will come from a severe crash, your returns will never be as good as they looked initially. Do not believe in historical market returns. You are not the market; the market is a collection of investors that collectively drive the return.
Did Tiger Global Management have a risk mitigation strategy? Did they narrowly dodge large losses during the COVID-19 crash and become overconfident? No one knows except for them. Although, the injection of liquidity from the fed turbocharged growth stocks, a large component of Tigers’ portfolio.
Now, they will be faced with trying to recoup losses of close to 65% in a rising interest rate environment. It is possible that this could be the end of the fund altogether. Selling creates a permanent loss that will need to be recouped. And in case anyone needs to be reminded, getting back 50% losses means more than 100% needs to be regained. Tough sledding ahead.
Risk mitigation is not easy and this goes for any business, not just hedge funds and asset management. It is frequently not cost-effective and the cure can be worse than the disease, but without a safe haven asset or process, it would be rational to acknowledge that many of your gains will eventually be given back. Plan accordingly.
For fun, let’s see how even a basic risk strategy can go wrong, albeit the losses can probably be rectified with a talented manager later on. Let’s pretend that the COVID-19 crisis played out slightly differently than the reality. If the COVID-19 crisis ended with the market only falling 15%, but you cut your position at the exact bottom, the market could rally faster to the upside than you could possibly get back in. Imagine cutting your losses at 15% but watching the market race higher afterwards, requiring making up close to 25% peak to thought. A loss of 15% plus the market is ten percent higher when you need to buy back in. Performance and track record, therefore, become more difficult to recoup, no different than Tiger Global Management.
Avoiding steep losses and the need to sell is the only way to get the necessary returns. Cutting returns at the worst time can also hurt.