James Pallotta’s Raptor Capital Management hedge fund traces its origins back to October 1993 when it first opened its doors to investors under the moniker Raptor Global sponsored by Tudor Investment Corp. At Tudor, under the continuous management of Pallotta, Raptor delivered an impressive streak for 13 years of 19% average annual returns that ended in 2007 with a loss of 9% for the year. By August of the following year, as the financial crisis swung to full force, a letter to shareholders announced that Raptor Global will be spun off from Tudor by the end of the year and continue to be managed by Pallotta at an independent firm.

By the time the spin off was completed in January of 2009, the fund had reported an unprecedented loss of 20% for 2008. After a mostly flat performance for the first six months of 2009, in a letter to shareholders Pallotta announced that he will be winding down the fund. By now, from an onslaught of importunate redemptions, the fund reportedly had assets under management of close to one billion (360 million of it in stock holdings as revealed in SEC filings for end of March), a far cry from a peak of 12 billion dollars in its heyday. As outlined in the letter, the average annual returns for investors, however, still came in at an impressive net-of-fees 13.85% from October 1993 through May 2009, handsomely outperforming the average 6.53% return of the S&P 500 for the same period.

In his letter Pallotta also indicated that he had no intention of stopping his investing tenure, but simply needed time off to structure an “optimal investment strategy” and to that end would keep Raptor Capital operational to partner with his investors again. As early as September 2009, the media was reporting that sources close to Pallotta were implying he is in a capital-raise mode for 200 million with an offer to charge performance fees to previous investors only after having surpassed the last high watermark.

Since Pallotta is not very communicative with the media when it comes to investments, the story is best told by required SEC Filings. By end of June 2009, Raptor had indeed disposed of all its stock holdings. In September, there was a small build-up of three stock positions amounting to 1 million dollars. This was followed by more significant increases – 24 holdings worth 24 million in December 2009, 56 holdings worth 63 million in March 2010, 46 holdings worth 81 million in September, 64 holdings worth 147 million in December, and 60 holdings worth 204 million in March 2011. As per the last filing for end of June 2011, the fund holds 55 positions representing 207 million, thereby having achieved the 200 million (fully deployed into stocks) mulligan that Pallotta had sought according to the media.

Investment Philosophy:

From the very beginning of his investment tenure, Pallotta was focused on achieving superior returns through stock selection. While working at the long/short fund of Essex Management, he built a reputation as an ace stock picker. It was word of his stock picking abilities that led to an invite to a breakfast meeting with Paul Tudor Jones who was then managing close to 15 billion in macro style hedge funds. Jones immediately recognized Pallotta as the ideal stock picker to complement his macro trading style which comprised trades in assets ranging from commodities to currencies to individual securities. Not only did the partnership last fifteen years, but Jones made public his intention to invest in Pallotta’s spun-off group – an affirmation of Pallotta’s very own inimitable style.

It seems that only during the financial crisis of 2008 Pallotta realized that his strategy of picking stocks and (when needed) holding them for the long haul went counter to the hedge fund culture (not to mention the realization that shorts did not have enough correlation to the longs to prevent the volatility) . In August of 2008, as he was preparing to spin off his fund from Tudor, the ever press-shy Pallotta was reported to have voiced his concerns to his peers about the viability of a stock-picking strategy when volatility was causing jittery investors to pull the trigger prematurely resulting in irreversible losses. This concern was echoed in his letter informing shareholders of the shutting of Raptor where he questioned “the sustainability of certain aspects of the industry’s structure and short-term focus” after having observed the industry from a “front row seat” for 22 years. Similarly, post unwinding the spun-off Raptor, sources close to him said that he was contemplating a structure that would allow him to have a longer term focus than the typical equity hedge fund.

The new Raptor, then, at least in its intentions, is Pallotta’s investment vehicle where he can implement his investment philosophy of selecting individual securities and hold them as long as needed (or, as he stated in the letter, a “compounding of superior risk-adjusted return over time”). This parallels Raptor Capital Management’s recent forays into venture capital/private equity investments and Pallotta’s own long term holding in the Boston Celtics.

Manager Background:

Prior to founding Raptor Capital in 2009 and managing Raptor Global at Tudor since 1993, James Pallotta spent five years in research at Essex Investment Management Company. He earned his M.B.A. degree from Northeastern University and majored in Finance at the University of Massachusetts.

Besides managing funds, he makes his own private investments (most famously in the Boston Celtics) and is an active philanthropist gifting tens of millions of dollars annually.

QUOTES

“Every investment helps me in what we are doing. Our network is our business.”

“I’m going to manage my money and my business the way I think they should be, rather than how others think they should be.”

“I believe that there is a place for a model which aligns the interests of investors and managers toward the goal of truly-shared compounding of superior risk-adjusted return over time.”