Activist investor Jonathan Auerbach “Hounded” by Losses

2015 wasn’t a good year for most hedge funds, but it was particularly excruciating for hedge funds founded by the protégés of industry legend Julian Robertson, better known as ‘Tiger Cubs’. Though some of those hedge Tiger Cub-led funds have managed to recoup some of last year’s losses this year, Jonathan Auerbach‘s Hound Partners has fallen even further in the returns table. According to Institutional Investor’s Alpha, the New York-based long/short equity hedge fund has lost money in nine of the past 12 months and four of the first five months of 2016. In May, the fund generated negative returns of 1.3% and is currently down 12.5% since the beginning of 2016. Hound Partners’ last 13F filing reveals that the fund’s equity portfolio consisted of 24 long positions, and its top five stock picks alone amassed over 50% of the value of its equity portfolio at the end of March. Since the fund was betting big on these stocks going into the second quarter, in this post, we will analyze their performance so far in 2016 and see how they have individually contributed to the fund’s performance this year.

Trough extensive research, we determined that imitating some of the picks of hedge funds and other institutional investors can help generate market-beating returns over the long run. The key is to focus on the small-cap picks of these investors, since they are usually less followed by the broader market and are less price-efficient. Our backtests that covered the period between 1999 and 2012, showed that following the 15 most popular small-caps among hedge funds can help a retail investor beat the market by an average of 95 basis points per month (see more details here).

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#5 Carter’s, Inc. (NYSE:CRI)

 – Shares Owned by Hound Partners (as of March 31): 2.15 million

 – Value of Holding (as of March 31): $226.72 million

Let’s begin with Carter’s, Inc. (NYSE:CRI), in which Hound Partners reduced its stake by 46% during the first quarter. After witnessing a correction during the second-half of 2015, shares of the apparel maker have again resumed their uptrend this year and are currently trading up 15.63% year-to-date. Carter’s, Inc. (NYSE:CRI) has been among the best performing apparel stocks since the end of the financial crisis, in the last five years alone it has appreciated by over 250%. Though the company’s comp sales have been weak of late, the growth of its web business has been tremendous over the past few quarters, which has more than compensated for the weak comps. Most analysts feel that despite the rally in its stock, Carter’s, Inc.’s stock is still reasonably valued at current levels. Hedge funds that initiated a stake in the company during the first quarter included Anand Desai‘s Darsana Capital Partners, which purchased 1.15 million shares of the company.