Lone Pine to Combine Long-Only Funds

October 18, 2013   Stephen Taub

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The firm, founded by Tiger Cub Stephen Mandel Jr., is merging its domestic and emerging markets-focused funds.

Stephen Mandel Jr.’s Lone Pine Capital is merging its two main long-only equity funds, Lone Cascade and Lone Dragon Pine, according to the Greenwich, Connecticut hedge fund firm’s third-quarter letter to investors. The firm is combining the two funds at the beginning of next year due to a lack of investment opportunities in one of the strategies.

The Lone Cascade fund includes the long positions contained in the firm’s long-short equity hedge funds, while Lone Dragon Pine specializes in emerging-markets stocks. Mandel is having trouble finding enough emerging-markets stocks that are trading at attractive valuations to provide adequate diversification for a stand-alone fund, according to a person familiar with the firm.

The move coincides with the launch of the firm’s new Lone Tamarack hedge funds, the firm’s first new hedge funds in a decade, which will focus on the most liquid stocks in the firm’s portfolios. In addition, Mandel told investors in his two main long-short equity hedge funds, Lone Cypress and Lone Kauri, that he will not be giving back capital at the end of the year but will probably do so if things subsequently go well. Since 2005, Lone Pine has maintained about $8 billion to $9 billion in its hedge funds. The firm now manages $22 billion.

Mandel — who started returning some capital to investors at the end of 2001 to maintain the level of assets he likes — returned some money after posting gains in the mid-20 percent range in 2012. He is likely to return some money by the end of 2014 if the hedge funds are profitable next year as well, according to the person.

Lone Cypress and Lone Kauri are up 10.9 percent and 11.2 percent, respectively, through the first three quarters of the year. The top ten holdings in Lone Cypress through the end of the third quarter were Dollar General, Monsanto, Priceline.com, Kinder Morgan, Gap, Valeant Pharmaceuticals International, Cognizant Tech Solutions, Qualcomm, Global Logistic Properties and Baidu. Interestingly, Google is no longer one of the firm’s top 20 holdings.

Lone Cascade is faring especially well; it is up 22 percent net through the first nine months of 2013 after gaining 7.8 percent in the third quarter, according to the letter. Lone Dragon Pine was in losing territory for the first half of the year. However, an 8.7 percent gain in the third quarter put it up 2.8 percent for the year to date.

Many of the major emerging markets are believed to be suffering these days from too much demand chasing not enough supply. Some managers prefer to avoid bank, natural resources and utilities stocks since many of the companies are government-owned or controlled. As a result, the remaining consumer, technology and business services stocks have been bid up to outrageous levels.

In the letter, Mandel — who like most long-short hedge fund managers has been hurt by his short positions in the very strong market for stocks this year — addresses the challenges of shorting in general, a rare glimpse into the thoughts and words of one of the industry’s most successful, and secretive, hedge fund managers.

"There has been much gnashing of teeth in recent years questioning the ability to be a successful short-seller," the letter states. "A crowded playing field, the high correlation among stocks, lack of short rebate and the absence of irrational exuberance creating concrete 'bubbles’ have all been blamed."

The firm adds in the letter that it is "inherently difficult" to sell short, asserting it is an uphill fight to make absolute dollars shorting except during a bubble.

"Opportunities to make significant money shorting stocks are sporadic and infrequent," the firm adds. In fact, it has occurred just twice in the past 15 years, the firm says, pointing to the Internet/telecom bubble and the mortgage bubble. But when they occur "the profit opportunities are very significant," Lone Pine adds.

As a result, the firm assures investors that shorting individual stocks remains an ongoing, active part of its business. It adds, "We are poised with our pin for the next bubble."

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