JAT Capital Management was founded by John Thaler in 2007. The $2.5B plus long/short equity hedge fund headquartered in New York, New York, markets itself as fund with a “philosophy of making money on both sides of the book,” according to a document obtained by Bloomberg News. Last year (2011), despite the debt turmoil in Europe and high market volatility, JAT Capital returned 13%, a remarkable feat considering that the average hedge fund was down 4%.
John Thaler after graduating from the University of Chicago with a degree in Economics, embarked upon a financial career: first working at the Investment Banking division of Merrill Lynch, and then progressing to become an associate at Spectrum Equity Investors, a telecom, media and technology-focused private equity firm in Boston. Mr. Thaler returned to the New York area to become a pre-launch team member at tiger cub Chris Shumway’s Shumway Capital Partners, where Mr. Thaler successfully covered technology, telecom and media companies eventually becoming a portfolio manager before the firm closed in 2010. In 2007, with Mr. Shumway’s blessings and his $200 million in seed money, Mr. Thaler launched JAT Capital Management.
Given Mr. Thaler’s background in the technology, media and telecom sector, JAT Capital Management accordingly initially had ninety percent of its investments in that sector. Now, those sectors represent half of JAT Capital’s investments and the other half in consumer, industrial and gaming industries. Mr. Thaler has a bare knuckle think big investment approach: taking big risks to make big gains. He implements his, what he refers to as, thesis with a boom or bust zeal, backed with a bottom up ‘kick the tires’ approach, historically achieving higher returns than most of the other hedge funds. Mr. Thaler’s investment philosophy, much influenced by his former boss Mr. Shumway, who still advises him, involves delving into businesses that he believes are undervalued and those that he thinks are overvalued, usually taking 60 to 100 positions at any given time. Generally, Mr. Thaler tends to hold long positions for two years and short positions for three to twelve months.
His strategy, though volatile, has worked in that past, although JAT Capital is in hot water so far this year (2012). In 2008, the year the S&P 500 index was down around 37 percent and hedge funds generally lost 20 percent, JAT Capital lost just 6 percent. The subsequent year the fund was up 20 percent and in 2010 gained a decent 10 percent. Last year, Mr.Thaler ascended the hedge fund pecking order by delivering a remarkable 17 percent compared to an average hedge fund loss of 5 percent, winning many admirers and opening the floodgate for investors.
The fund has grown at a breakneck speed over the past few years not only thanks to Mr.Thaler’s success but also to the fact that after 2010 when Shumway Capital closed, investors looked to Mr. Thaler whose impressive returns were hard to ignore. Also, given near zero interest rates and market volatility, institutional investors lined up at Mr. Thaler’s door so much so that last he decided to close JAT Capital’s doors to new investors last year. “Investors move in herds,” explains Hany A. Shawky, a professor of finance at the State University of New York at Albany. Once a manager is recognized and a few articles about him/her are published, investors are attracted to the manager’s fund like moths to a flame, opening their pocketbooks.
But the fast-money world of hedge funds is nobody’s fool, investors’ adulation can quickly turn to scorn and Mr. Thaler’s reversal of fortune, JAT Capital is down almost 20 percent this year so far, may be another cautionary tale for investors who pursue returns of “fad” managers. In reality, returns are volatile and managers but rarely can duplicate their éclat and gains year after year.
Part of the challenge for Mr. Thaler was the rapid growth of JAT Capital, with more money available for investment, the range of investments needed to be broadened. Mr. Thaler’s move into consumer-related investing reflects an effort to expand his portfolio but his foray into large concentrated bets on consumer stocks, such as Tempur-Pedic, have left him with much to be desired for as JAT Capital is down 20 percent.
In his letter to the investors, Mr.Thaler admitted being “wrongheaded” about his move into the consumer sector, which accounted for 81 percent of his losses in April this year, and that that has prompted him to revert to his core expertise: the technology, media and telecommunications sectors. However, JAT Capital’s volatility is not entirely surprising as last year the firm went through a similar scenario, flying high mid-year and shot down at year end losing half its gains, but still ending the year comparatively better-off than most hedge funds. In the same letter, Mr. Thaler expressed his “great disappointment” in the last seven months, promising to “examine the drawdown and review if a change should be made.”
In the hedge fund industry, however, anything is possible and Mr. Thaler’s fortunes might change. Manager’s when caught in similarly ambiguous positions, as the one Mr. Thaler faces presently, have either recovered from such losses in a month or exacerbated them beyond the point of repair. John A. Paulson, the sub prime mortgage conqueror, comes to mind who has worn done both: dusting of his losses and burying himself in some. Mr. Thaler further expounds in his letter to investors that even though he still firmly believes in evaluating everything he does on due process rather than the outcome, he cannot fully ignore the losses experienced in the consumer sector as they affect the entire portfolio. These losses together with market volatility have subjected Mr. Thaler to take a more defensive stance in other sectors of the book.
“Find a thesis, not a stock idea. JAT Capital conducts a bottom-up ‘kick- the-tires’ approach to research that forms the foundation of ideas.” (JAT Capital marketing document).
“While I am a firm believer in evaluating everything we do based on the process rather than the outcome, it is difficult for me to ignore the loss we have taken in this sector, the volatility it has added to the funds and the fact that this loss and volatility has forced us to play defense in other sectors of the book.” ( June 2012)
“The performance of the funds over the last seven months has been a great disappointment to the team and to me personally. After any period like this, we are left to examine the drawdown and review if a change should be made.” (June 2012)