Glenview’s Robbins Tops Hedge-Fund Ranking
When Larry Robbins was a boy in the Chicago suburbs, his father, Sheldon, worked two jobs and wasn’t around much. If the young Robbins wanted to see him on weekends, he had to travel to Arlington Park, a nearby horse-racing track that his dad ran. During those Saturday visits, his father taught him how to handicap horses. One lesson: Know the horse and the race. Was the track dry or muddy? Did the horse win because he was fast or because the competition was lousy?
The lesson stuck with him. His corporate handicapping helped his $1.8 billion Glenview Capital Opportunity Fund to an 84.2 percent gain through Oct. 31, which made it No. 1 in the annual Bloomberg Markets ranking of the best-performing large hedge funds. Robbins, 44, chief executive officer of Glenview Capital Management LLC, trounced his rivals by betting on U.S. stocks as they rose to record levels, Bloomberg Markets magazine will report in its February issue. He’s predicting at least another year of gains, while other managers fret and hold cash.
“The current environment is opportunity heavy, and it’s return heavy,” Robbins says in an interview at his offices in the General Motors Building on New York’s Fifth Avenue. “We’ve been taking advantage of it rather than having our bats on our shoulders while they’re throwing underhanded softballs.”
Robbins, who has played ice hockey since he was 5 and has a weakness for sports metaphors, swung hardest at health-care companies -- hospitals in particular. One of his biggest holdings, Tenet Healthcare Corp. (THC), which runs medical facilities in 14 states, jumped 45 percent in the first 10 months of 2013.
Robbins has been heavily invested in health-care stocks since 2004. He loaded up on hospital shares in 2012 after the Supreme Court let stand President Barack Obama’s Affordable Care Act, eventually pushing the hospital portion of his entire portfolio -- which also includes his less-concentrated Glenview Capital fund -- to 33 percent.
Obamacare means there will be more insured people showing up at hospitals, and, unlike the uninsured, hospitals can make money on them, Robbins says.
Many of the managers who did well in 2013 shared Robbins’s all-in swagger. That’s what it took to beat the Standard & Poor’s 500 Index (SPX), which had soared 25.3 percent, with dividends reinvested, as of Oct. 31. Only 16 large funds -- those with more than $1 billion of assets -- surpassed the index.
Unfortunately for the industry, this underperformance is becoming routine. The last time hedge funds as a group bested U.S. stocks was in calendar 2008, when they lost 19 percent while the S&P 500 declined 37 percent, according to data compiled by Bloomberg.
Through October, hedge funds returned only 6.9 percent on average.
“It’s kind of a tragedy,” Stan Druckenmiller, the former chief strategist at Soros Fund Management LLC, said in a November interview with Bloomberg Television. “We were expected to make 20 percent a year in any market.”
Druckenmiller, 60, achieved an annualized return of 30 percent before retiring to manage only his own money in 2010.
Bill Berg, founder of Sigma Investment Management Co., a firm in Portland, Oregon, that picks managers for $600 million held by individuals and institutions, says 2013, like all bull markets, was a bad year for alternative asset managers who hedge their bets on stocks.
“Why do you need an alternative?” he asks. “You need one if normal isn’t working. Normal is working just fine.”
Some of the biggest managers were the biggest disappointments in 2013. Ray Dalio, who runs Bridgewater Associates LP, returned just 6 percent through October in his $63 billion Pure Alpha II fund, according to data compiled by Bloomberg. That meant it didn’t make it into the Bloomberg Markets 100.
Alan Howard, who invests $40 billion at Jersey, Channel Islands–based Brevan Howard Capital Management LP, saw his Master Fund rise less than 1 percent. Both Dalio and Howard are macro managers who try to profit from broad trends in bonds, stocks, commodities and currencies.
Dalio’s sheer size -- Bridgewater manages $88.6 billion in hedge fund assets -- made Pure Alpha II the most profitable fund in the first ten months of 2013, generating incentive fees of $897.4 million even though returns were subpar. His Pure Alpha I earned the firm another $294.4 million.
Dalio charges investors a management fee of either 2 or 3 percent of assets in his Pure Alpha funds plus 20 percent of any returns. The performance fees were enough to help Dalio -- who has a net worth of $13.8 billion, according to the Bloomberg Billionaires Index -- get even richer.
The most-profitable fund in 2012 was Steve Cohen’s SAC Capital International, which paid $789.5 million to Cohen and his managers, according to Bloomberg data. Cohen isn’t on the most-profitable list this year because he is returning investors’ money as his firm settles criminal charges from the U.S. government.
One big name made a comeback in 2013. John Paulson, 58, earned a record $15 billion betting on mortgage Armageddon in 2007 before stumbling for two years. In 2013, his Recovery Fund placed third in the Bloomberg Markets ranking by buying companies that are prospering in a healing U.S. economy. He bought financial firms like Leon Black’s Apollo Global Management LLC and Stephen Schwarzman’s Blackstone Group LP. He also invested in hotel companies that suffered chronic vacancies during the recession, including MGM Resorts International and Extended Stay America Inc. He purchased a stake in the 139-room St. Regis Bahia Beach Resort in Puerto Rico.
“We wanted something that would do very well on the long side in the recovery,” Paulson says in an interview in the library at his firm on 50th Street in Midtown Manhattan.
Many of the big winners, like Robbins, loaded up on a few high-flying stocks. They included David Goel’s Matrix Capital Management Co., at No. 2; Jeffrey Altman’s Owl Creek Overseas Fund Ltd., at No. 6; and the top large European funds, Lansdowne Developed Market Strategic Investment Fund, at No. 4; and The Children’s Investment Fund, run by Christopher Hohn, at No. 5.
The world’s best-performing midsize fund, with assets from $250 million to $1 billion, was Senvest Partners, managed by Richard Mashaal for New York-based Rima Senvest Management. The fund scored a 58.8 percent return for the first ten months of 2013.
Goel’s $1.6 billion Matrix fund returned 56 percent, with big bets, long and short, on technology, according to documents obtained by Bloomberg Markets. He declined to comment for this article.
Toronto-born Goel, 42, who graduated from Phillips Exeter Academy and Harvard University, worked as a technology analyst with famed stock picker Julian Robertson at Tiger Management LLC for almost four years before starting Matrix in Waltham, Massachusetts, in 1999.
In 2013, Goel picked cloud computing as a winner and got it right. Xero Ltd. (XRO), a New Zealand–based provider of online accounting software, rocketed 268 percent in the first 10 months of the year. Workday Inc. (WDAY) another cloud-computing firm and Matrix holding, jumped 37 percent.
Goel also bought shares of Netflix Inc. at about the same time in 2012 that activist investor Carl Icahn did, according to regulatory filings. It traded at around $60 then. It closed at $339.5 on Jan. 7.
Many of the top-performing funds follow an event-driven strategy. They make money betting on takeovers, spinoffs and restructurings. The time for those was right, Robbins says, because corporate boards had finally crawled out of the bunkers they had hidden in since the 2008 financial crisis. Starting late in 2012, many saw that the world wasn’t going to end and started behaving like companies again, he says.
“Cash holdings were near all-time highs,” Robbins says, working his way into another sports metaphor. “That’s like having LeBron James on your team and benching him,” a reference to the four-time winner of the National Basketball Association’s Most Valuable Player award.
Companies that continued to hold cash or underperform in 2013 got prodded by activist managers, who take a big stake in companies and harangue their directors to make changes that will improve profits.
Daniel Loeb at Third Point LLC, whose Third Point Ultra fund was No. 12 in the ranking, bought a 9 percent stake in Sotheby’s and then, in a public letter, compared the auction house to “an old master painting in desperate need of restoration.” He called on the CEO to resign, saying the company had fallen behind in sales of modern and contemporary art.
In October, Tobias Meyer, the auction house’s longtime head of contemporary art, did step down. The company’s shares climbed 13.5 percent from August, when Loeb first disclosed his holding, to Oct. 31. Third Point Ultra returned 28.8 percent through October.
Glenview’s Robbins calls his own brand of investing “suggestivism” -- a kinder, gentler version of activism. He’s led only one proxy fight in his career, against Naples, Florida–based hospital chain Health Management Associates Inc. (HMA), which he won in 2013 when shareholders voted in his slate of directors. He owned 14 percent of the company as of mid-December.
Oftentimes, companies need only a nudge, Robbins says. Take Tenet, in which Glenview owned a 12 percent stake as of mid-December. For a hospital company with steady revenue, it had modest debt, Robbins says. Robbins suggested to Chief Executive Officer Trevor Fetter that he borrow money to repurchase stock and consider making acquisitions. In June Fetter announced the purchase of fellow hospital operator Vanguard Health Systems Inc. for $1.8 billion in cash.
“Tenet did the logical thing,” Robbins says. Tenet shares rose after the June 24 announcement and were up 13 percent from that date through Oct. 31.
Owl Creek’s Altman made money with a sunny thesis on aviation. His funds bought shares of Boeing Co. and its suppliers, betting that the world’s airlines, which buy in cycles, would need new jets. Boeing shares soared 76 percent in 2013 as of Oct. 31, as customers stumped up billions for its new 787, despite production delays and a suspension of flights after the plane’s lithium-ion batteries overheated.
Spirit Aerosystems Holdings Inc. (SPR), a maker of cockpits and wings, returned 57 percent, while Precision Castparts Corp. (PCP), which manufactures turbine blades for jet engines, jumped 34 percent.
All of those stocks beat the S&P 500, and Owl Creek had bought them in bulk. The firm, named for the back road from Aspen, Colorado, to Snowmass, where Altman, 47, skis, was the fourth-largest holder of Spirit, with 4.9 percent as of Sept. 30. Altman bought it during dark days. In 2008, the Wichita, Kansas–based company contracted to build wings for General Dynamics Corp.’s Gulfstream business jets and had been struggling to make money because of rising costs for the wings’ components. In 2012, Spirit took a $590 million charge, mostly for the Gulfstream problems. The stock dropped as low as $14 a share.
Owl Creek had followed Spirit for years, and Altman’s team knew that the company, which was sold by Boeing in 2005, had contracts that guaranteed no-bid work on Boeing aircraft. Spirit is now making the forward fuselage, including the cockpit, and parts of the wing on the new 787. Boeing has orders for more than 1,000 of the planes.
“We loved the Boeing side,” says Altman in an interview, sporting a half-zip sweater, which is popular in the hedge-fund industry. “The market was looking backward at Gulfstream’s business.”
Altman’s biggest killing may have been on Fannie Mae (FNMA) and Freddie Mac, the government-controlled mortgage finance firms. The Treasury Department took over Fannie and Freddie during the 2008 financial crisis as their stocks hurtled toward zero and placed them in conservatorship. Altman bought preferred shares in both for 2 cents on the dollar, reasoning that the mortgage market would recover and that the companies would someday return as bulwarks in U.S. housing.
“We talked about it to the entire world for about four years, and no one listened,” Altman says. As of Oct. 31, the preferred shares in both companies traded at about 35 cents on the dollar.
The low-risk nature of the trade -- asymmetric risk, as the pros call it -- mimicked Paulson’s mortgage bet from 2007. Paulson & Co. bought cheap credit-default swaps on subprime-mortgage assets. The swaps soar in value as the probability of default increases. The capital risk was relatively small; the potential payout, huge. Paulson’s bets brought an almost sevenfold gain in his credit fund in 2007, and he personally made more than $3 billion, according to people familiar with the firm.
Then Paulson turned bullish -- too early. In 2011, his Advantage Plus Fund -- identical to his Advantage Fund except that it uses borrowed money to enhance returns (or magnify losses) -- dropped 51 percent after he bet on a rebound in the U.S. economy.
In 2012, he turned too bearish on Europe, speculating that the debt crisis there would deepen. European Union governments and the European Central Bank stepped in with aid, and Advantage Plus fell another 19 percent. Paulson & Co.’s assets tumbled to $17 billion in mid-2013, from a peak of $38 billion in 2011, as investors lost faith.
In 2013, Paulson proved he wasn’t a one-hit wonder; he had five funds on the top 100 list. In addition to gains in Paulson Recovery, his Advantage (tied for No. 67) and Advantage Plus (tied at No. 23) funds, which now account for $4.3 billion of his assets, returned 14.7 percent and 21 percent, respectively.
“The biggest lesson I learned was that it is very difficult to predict future market trends,” he says, so he uses less leverage when making his bets. Sitting in the library of his firm, he’s surrounded by signs of his good fortune. An Alexander Calder watercolor hangs behind him. And there’s a photograph of him on the tennis court with George Soros in Southampton, New York, where he owns an estate that he purchased for $41 million in 2008.
Paulson still has exposure to a declining asset: gold. He bet big on the metal, speculating that the U.S. Federal Reserve would debase the dollar and trigger soaring inflation by pumping cash into the economy with bond purchases that totaled $85 billion a month through December.
Paulson’s six largest funds each have a share class denominated in gold, meaning the value of the fund rises and falls with the price of the metal. Paulson also started a fund devoted to gold alone. Now called the PFR Gold Fund, it invests in mining stocks and bullion. It fell 63 percent for the year through Oct. 31. Almost all of the $370 million in the fund is Paulson’s own money.
Paulson told clients in November that he wouldn’t invest more money in his gold fund because it’s not clear when inflation will accelerate.
Robbins says he doesn’t get involved with gold. He sticks to companies that are growing regardless of economic cycles; so he owns no energy or mining stocks.
Robbins says he never expected to become a hedge-fund manager. He grew up middle class in Arlington Heights, Illinois. He played hockey one town over, in Glenview, and loved it so much that he named his firm after the team.
Robbins went east for school, getting simultaneous bachelor’s degrees from the University of Pennsylvania in systems engineering and, from Penn’s Wharton School, in marketing, finance and accounting.
“I didn’t want anyone to be able to talk over my head,” he says.
Robbins always figured he’d return to Chicago. Instead, he went to work in New York for investment bank Gleacher & Co. (GLCH) After 2 1⁄2 years there, he interviewed with hedge-fund firm Omega Advisors Inc., founded by Leon Cooperman. He didn’t really know what a hedge fund was, he says, but he knew he’d get to learn a lot about companies and industries. He also liked the meritocracy of the markets.
“You don’t need a Rolodex, and you don’t have to belong to the right country club,” he says.
Robbins stayed at Omega for five years, learning at the right hand of Cooperman, a top stock picker. In August of 2000, he left Omega, took the weekend off, then began building Glenview. On Jan. 1, 2001, he started trading. Since then, the firm has grown to 72 people. Robbins is the only money manager, but he works closely with his 32 analysts. All of them stay in close contact with their portfolio companies, suggesting to them ways to spur growth.
“We try to think and act like owners,” Robbins says.
Robbins enjoys his success. When he wanted a place to play hockey with his four sons, ages 10 to 14, he built a 13,000-square-foot (1,200-square-meter) covered ice rink, just beyond the pool, at his sprawling estate in Alpine, New Jersey.
“It’s our family’s field of dreams. My wife’s the architect, and my kids skate circles around me,” he says.
In June 2012, he flew 80 people to France for his wedding to Sarahmay Wesemael, his second wife. Wesemael wanted to get married in Saint-Jean-Cap-Ferrat in the south of France, near where she grew up.
Robbins does have one wish that will never be fulfilled. He’s 5 feet 10 inches (1.8 meters) tall and weighs well over 200 pounds (90 kilograms). In his 10-year anniversary letter to investors, he said he had always wanted to top 6 feet. “There’s nothing wrong with 5’10”; it is just human nature to wish for a little bit more,’’ he wrote.
Competitors say Robbins’s optimism for the year ahead is about to be tested. Hyper-activist investor Carl Icahn, for one, says shares have risen too much, and aren’t supported by earnings. Veteran short seller Bill Fleckenstein is reopening his fund and is scouting for overvalued technology companies.
Though bullish, Robbins is hardly overconfident.
“The road from market genius to village idiot is exceedingly short,” he says. Other hedge-fund managers -- the ones who couldn’t beat the surging S&P 500 despite their high fees -- know just how short it is.
How We Crunched the Numbers
Our rankings of hedge-fund managers are based on data compiled by Bloomberg specialist Anibal Arrascue and information supplied by hedge-fund research firms, hedge funds and investors. We have three lists of top performers: 100 funds with assets greater than $1 billion; 25 funds with assets of $250 million to $1 billion; and the 20 most-profitable large funds. Assets and returns were for the 10 months ended on Oct. 31.
The first step in calculating profits was dividing a fund’s net return by 100 percent minus the sum of the management-fee and incentive-fee percentages. If a fund didn’t report its fees, we used the average of funds in our universe: a 2 percent management fee and a 20 percent incentive fee.
Using gross returns, we were able to reconstruct approximately what the assets were at the start of the year. (Because we didn’t have inflows or outflows, the asset numbers didn’t take asset flows into account.) We subtracted original assets from current assets and multiplied the result by each fund’s performance fee to derive the profit figures. Management fees aren’t included; we assumed they were used for the day-to-day operations of the fund.
Several funds appearing in the most-profitable ranking don’t show up in our lists of top performers. That’s because the size of a fund can trump returns when calculating profits.
We couldn’t obtain return figures from several of the biggest hedge-fund firms by assets. For a handful of other firms, we had returns for only one or two funds. Onshore and offshore assets and returns were combined for a number of funds, while figures for other funds were for only the larger or better-performing class.
Some of the numbers were difficult to verify. Unless the information came from Bloomberg or the hedge-fund firm itself, we tried to verify it with other sources, including investors and other fund databases.