Bridger Management was founded by Roberto Mignone in the summer of 2000 in New York City. Despite starting in a declining market, after having opened its doors for a few months, the hedge fund had approximately 80 million dollars under management – partially because Mr. Mignone had already shown his investment finesse to investors at his previous employer Blue Ridge Capital and partially because it was a long-short strategy (the short side being suddenly attractive). Today the firm oversees about 2.5 billion dollars.
Although Bridger Management is very reticent (more so than the typical secrecy of most hedge funds) about its returns and Mr. Mignone rarely speaks about investment matters in the media, the firm and the manager’s profile in Katherine Hunter’s excellent “Hedge Hunters” provides some indicative numbers responsible for the impressive size of the fund. (Overall, this article borrows heavily from the book “Hedge Hunters” published by Bloomberg News in 2010.)
From its inception in mid-2000 through mid-2007, the fund returned about 16% net of its traditional 2-20 fees. In 2008, the fund faltered and in spite of its short positions recorded a loss of 20% — still outperforming the 37% loss of the S&P 500 index. As of September 2009, the fund had regained 11% year to date, and from current SEC 13F filings show the long side of assets under management comfortably back to the pre-2008 level – this is attributable to pure performance as they stopped accepting net new investor money. (Since Bridger Management follows a long-short strategy, and the shorts are not required to be detailed in the filings, it is not possible to derive an idea of returns.)
While the returns and size of Bridger Management place them among some of the top money managers, Mr. Mignone’s background is different from most of his peers. Firstly, he did not have any exposure to or interest in the stock markets at an early age. Secondly, he never intended to manage money.
Rather, he was deeply absorbed in the study of classical languages Greek and Latin that he first encountered at the Fordham Prep School in Bronx (close to his birthplace, Hell’s Kitchen, and Yonkers where he was raised). He went on to pursue his passion for the classics at Harvard University and finished his undergraduate studies in 1992.
Following that, he spent two years as a Deloitte consultant to a US agency in Moscow to help set up capital markets. When he returned to NYC, he took up a job as a junior analyst for the investment banker DLJ. He found the grueling hours of the junior analyst overwhelming (yet missing his calling!) and only after six months he returned to Harvard, this time for an MBA.
Having finished his MBA, he was contemplating a PhD to become a career academic (akin to most of his extended family that are academics and doctors), when he was approached by his friend John Griffin. At the time Mr. Griffin was the president of Tiger Management run by the acclaimed long-short manager and mentor par excellence Julian Robertson. Mr. Griffin was in the process of starting his own fund Blue Ridge Capital and joining the growing ranks of the Tiger Cubs. He offered Mr. Mignone a position as a senior analyst at the start-up fund.
Perhaps due to his experience at DLJ, Mr. Mignone did not hurry himself into the opportunity – instead he consulted with his academic advisor to see if the path would be intellectually satisfying. In the final analysis, he decided to give it a try for three years.
Unlike at DLJ, Mr. Mignone became enamored with the role of analyst at Blue Ridge Capital. Under the mentorship of Mr. Griffin, he was motivated by the intellectual challenge of the extensive research that went into creating long and short positions, especially the latter. Till today he classifies himself as an analyst first and foremost, then a portfolio manager.
Exactly after three years at Blue Ridge Capital, at the end of the prosperous 1999, like a true Tiger Cub (or, technically, Tiger Cub’s Cub) Mr. Mignone ventured out on his own.
When he started Bridger Management, he was joined by the health care junior analyst Blake Goodner from Blue Ridge Capital. While that accounted to an extent for the fund’s ongoing concentration in the health sector, in reality Mr. Mignone continues to be a generalist, as is reflected by the fund’s current composition of two health care and seven general analysts including himself.
While using the experience of the set-up and investment philosophy of Blue Ridge Capital to launch Bridger Management, Mr. Mignone brought his own unique approach to the short-long structure and research methodology.
On the structural side, he generally mandated a three year holding period for both long and short positions to come to fruition. The long side is normally limited to thirty positions, starting with a five percent stake of the portfolio and allowed to grow to about ten percent. The short side is doubly diversified through sixty holdings, cautiously initiated at two percent or less of the portfolio and only permitted to grow to four percent. Within this structure, the fund’s net long exposure ranges from a low of twenty percent to a high of sixty percent.
Depending on the market conditions, the fund derives its returns in different proportions from its long and short positions. From 2000 to 2006, the returns were generally attributable equally to the longs and the shorts. There was a notable deviation in 2003 (the first time the fund did not outperform the S&P 500 that returned 26%) when the fund had a gain of 40% in the long holdings and a loss of 30% on the short holdings. Since this was caused because shorting opportunities were generally harder to find by the virtue of the two-year decimation of many companies spurred by the dot-com growth bubble, the underperformance did not lead to a fundamental rethinking of the structure.
The negative return of 20% in the financial crisis of 2008, however, resulted in Mr. Mignone at least expressing some concerns of the structure itself, especially the stipulated three year holding period and to a lesser extent the gross exposure. In a letter to shareholders in 2009, he voiced how the perceived rigidity of the holding period worked against the fund as they were not fast and nimble enough to react to the changing markets and in undoing positions accordingly. He also said that they had levered down their gross exposure for now, but he emphasized that they have to be attentive to changing market conditions going forward and not fall into the trap of “recency” whereby their portfolio becomes too conservative in deference to the past. Mr. Mignone seems to have heeded his own advice as revealed by the 13 F filings of September 2011 of Bridger Management reported further building of its long S&P 500 call options for face value over one billion dollars. Regardless of the other longs and shorts, this is a bullish call, especially considering that they do not short indices.
While the structure underwent a rethinking in 2008, the research methodology continues to be the constant cornerstone of Bridger Management. This is because the research approach harks back to Mr. Mignone’s classical studies, the principles of which are seemingly timeless as nobody has found a successful method to replace the laborious readings of the original texts in the original languages.
While learning the classics at Fordham and Harvard, he recalls being constantly urged to refer to the original texts themselves to understand them. Not only was he encouraged to test scholarly interpretations in light of the reading of the originals but was also taught that a translation of the original text cannot be devoid of interpretive distortions itself. In short, the only way to verify a thesis was to go to the primary source.
Further, in his study of the classics, he learned the importance of the capacity to summarize a theme succinctly. For instance, the opening lines of Homer’s Odyssey foretell the whole action of the epic poem and the closing words of a chorus at the end of most Greek tragedies recapitulate the whole play. Not that these opening and closings make the rest of the text irrelevant, but, on the contrary, they provide the essential thematic framework to best understand them.
Also, it is a reasonable inference, that the content of the texts, especially the Greek, influenced Mr. Mignone’s outlook in general and approach to research in particular: the voice of reason of the chorus as it detachedly observes the follies of the mortals, the centrality of and difficulty in attaining the truth (as it is often not the popular option), the immutability of certain laws, and so forth.
Capturing the elements of classical scholasticism, the research at Bridger Management begins with an analyst building a theme around a stock, the theme being “obvious”, one that can be communicated in one sentence. Then one seeks evidence against the idea – the investment thesis has to withstand this first round of analysis. (One wonders how many long ideas end up being shorts and vice versa.)
After the idea is whetted against all contrary evidence, only then the analysts verify their thesis – not by relying on secondary sources or poring over company and Wall Street sell-side estimates, but by gaining primary knowledge through attending conferences, talking to competitors and vendors, visiting company sites, and interviewing specialized trade journalists.
While number crunching is a necessary part of any intelligent stock research, it is neither where the ideas are generated nor does it play an overwhelming role. As far as idea generation for the short side, it is more often than not picked from the consensus of Wall Street analysts touting the latest buy list.
For instance, SureBeam was a Wall Street darling as was evinced by its successful IPO in 2001. The company’s business was to sell ground beef that was irradiated for bacteria. Since the cost only increased by a penny per beef patty irradiated, the company’s business model was counting on consumers forking that extra penny to avoid ecoli or other unhealthy bacteria. While the company was optimistic and their estimates were being mostly taken on face value by Wall Street analysts who saw the next big thing in beef, Bridger Management built a short position in the stock.
Yet, as the stock surged against their short position, they further investigated the company. After many investigative routes, they ended up in stores where the product was being test marketed. There they found that the product was being pushed aggressively by discounting it by 20% through in-store promotions – Wall Street had no idea whatsoever about this! Having found this nugget of research from a primary source (which was not available to be gleaned from the spreadsheets), Mr. Mignone was now further convinced of what he termed his “obviously predictable” thesis that there will be no demand for irradiated beef, and built on the short position. The stock went down as the disappointing numbers emerged in Wall Street.
While Bridger Management was relishing its unrealized gain of 200% plus on SureBeam, the stock once again gained the approval of investors. In an outlandish consequence to the post 9/11 anthrax mailings, it appeared that Sun Beam was engaging in talks with the US government to provide irradiation services to the postal service to neutralize the anthrax in the letters. While the agility of a company that finds a new market is admirable, Mr. Mignone had his own doubts about this latest business model.
He and his analyst once again set out to visit the company site hosting the machines. First of all, the machines were sealed off by thick walls. Secondly, before entering the building, the woman analyst accompanying them had to sign a disclaimer stating that she was not pregnant. Thirdly, they discovered that the amount of radiation needed to neutralize anthrax was so high that it would actually melt a mail box. (The absurdity of all of this was not lost on the Bridger analysts as they termed it the “postal story”.) Equipped with this primary information (which once again was not pursued by Wall Street), they shorted the stock further. By early 2002, the stock was back to its pre-September level.
While it is not known how long the short position was maintained by Bridger Management, SureBeam went bankrupt in 2004 and in its three year life on Wall Street did not produce a profit even once. Apparently, they could not even get FDA approval for irradiation of other foods. If Bridger Management subscribed to their three year holding period for this position, then their short worked all the way to a zero stock price.
In today’s volatile markets shorting strategies have become more prevalent again. For Bridger Management, this translates into not only avoiding the consensus of the long-only analysts (which they have traditionally done) but also avoiding consensus on the short side. For example, when they shorted the biotech company Dendreon because their thesis was that they will have difficulties in attaining FDA approval for their prostate cancer vaccine as the studies for the same were inconclusive, they were not aware that quite a few other investors were taking the same stance. So when the advisory committee approved the study and the company moved a step closer to FDA approval, the stock surged as other short investors without any long term conviction closed their short positions. This resulted in what is known as a short-squeeze sending the stock soaring. The flip side of this would be investors exiting en masse a long position when the company releases negative news.
Mr. Mignone attributes this recent growth in consensus (or, more bluntly, herd-mentality) in hedge funds’ research to the fact that hedge fund management is currently one of the most pursued careers. Consequently, there is a lot more networking at the junior level in the industry as many people want to join it – this is in contrast to his graduating class from Harvard Business School where there were only two students from eight hundred that joined hedge funds.
Today, the hotness of his industry results in most people joining the business being homogenized by the flow of information and finding comfort in the consensus that ails Wall Street analysts. Mr. Mignone finds an antidote to this herd-mentality in selectively choosing new hires that exhibit a true passion for research and then providing one-on-one mentoring. It is fair to anticipate that Tiger Cubs will emerge from Bridger Management.
“We’re trying to make as much money as we possibly can without doing anything stupid”.
“I view myself first and foremost as an analyst”.
“If you could sum up the masterpieces of all time in a single sentence, you should be able to present a compelling research idea in one sentence too, a Hemingway-like sentence.”
“I still believe that asset growth is to the detriment of performance if what you’re going to be is a long-short specialist”.