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
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
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