Whitney Tilson and T2 Partners’ Returns and Alpha

Whitney Tilson is getting a lot of coverage because of his Netflix (NFLX) short. Since September 1^st the stock market took off but Whitney Tilson’s T2 Partners lost 2% because of the performance of their short book. One might wonder whether Whitney Tilson even knows what he is doing. Is he just another value investor trying to imitate Warren Buffett or other hedge funds (see Warren Buffett‘s stock picks)? He personally said that he sometimes monkeys other hedge funds’ purchases. Is it even possible to generate alpha by imitating Warren Buffett or other hedge fund managers?

Insider Monkey, your source for free insider trading data, estimated Whitney Tilson’s monthly returns from a historical return chart. We measured each data point’s location relative to the lines on the graph and interpolated its value. For the past year’s returns we used his monthly investor letters which are all over the internet. Since he also provided year-to-date returns in his monthly letters, we were able to calculate the returns for missing months. Here are Whitney Tilson and T2 Partners’ monthly returns in 2010:

We analyzed T2 partners’ alpha in 3 year increments (and we used Carhart’s four factor model to calculate alpha). Usually one shouldn’t really pay any attention to any funds’ first 3 year performance. If they didn’t really performed satisfactorily, they wouldn’t be here today. If they can consistently achieve the same return over time, then it is a different story. Whitney Tilson had a monthly alpha of 93 basis points during his first 3 years. That’s a spectacular performance-  but he couldn’t keep it up. Between 2002 and 2004, Whitney Tilson had a monthly alpha of only 37 basis points. You should keep in mind that we used “net returns”, so Tilson’s investors benefit as long as he has positive alpha. Between 2005 and 2007, his alpha went down to 14 basis points. However, since 2008 Whitney Tilson achieved a monthly alpha of 64 basis points. His market beta was only 0.22 during this time period, but his “value effect” beta was 0.68 implying that he was investing in distressed/value companies.

Since 2005, Whitney Tilson achieved an alpha of 41 basis points per month after fees. Considering Warren Buffett didn’t have any alpha from 2000 to 2009, this is quite an achievement for a Buffett fan. His investors benefitted to the tune of 5 additional percentage points per year – which is nothing to sneeze at. Previously we found that Daniel Loeb had an alpha of more than 7 percentage points. Insider Monkey will also calculate the alphas of Whitney Tilson’s mutual funds to see whether small (individual) investors benefitted from his investment skill.