Low Market Exposure Helps Tabor Asset Management Climb The Returns Mountain
Equity hedge funds got their chance to shine recently given the pullback in equity markets in February and March, and they did – at least, to a certain extent – with the average equity hedge fund losing less than the S&P500. Still, since the beginning of 2009, the BarclayHedge Equity Long/Short Index has exhibited a correlation of 0.834 to the S&P500, too high for many investors who believe that hedge fund returns, regardless of the prevailing environment, should be uncorrelated to the beta performance of the market(s) they play in.
New York-based Tabor Asset Management began trading in early 2019 and manages an equity long/short TMTC (technology, media, telecom and consumer) fund which, at the time of publishing, exhibits a correlation to the S&P500 since its inception of exactly zero. Tabor targets a range of +/-15% net exposure to the S&P500, carrying anywhere from 20-30 long positions and 30-40 shorts at any one time.
Tabor Managing Partner and CIO, Jonathan Jacoby, is a 20-year veteran of the TMTC equities space. His previous stops include Millennium and UBS O’Connor, which he left in 2018 before founding Tabor. Tabor’s approach is rooted in Jacoby’s philosophy.
“We’re here to drive compounded returns with little exposure to the overall market and we look to achieve those returns with zero-market exposure on a daily basis"
“We’re here to drive compounded returns with little exposure to the overall market,” he said. “And we look to achieve those returns with zero-market exposure on a daily basis.”
Tabor’s conducts fundamental, bottom-up research on individual companies in the TMTC sector after identifying several broader themes that it believes will play out over the next 12-18 months. At the beginning of the year, these themes included, amongst others, structural weakness in movie theatres, rising wireless communications competition and growth in the video games industry. These themes constantly evolve to take in new information and they have naturally changed in the short term due to Covid-19’s effect on the global economy but Jacoby says that this is somewhat of a constant in Tabor’s part of the world.
“Themes are always evolving of course, especially now. But the world of TMTC and the consumer is always evolving anyway. We have a weekly meeting where we discuss all of our ideas and what’s affecting those ideas. But when we start working on an idea or a theme, we’re looking 12 months out. As we come out of this cycle, we’re looking for names and industries that because of the cyclical environment - the massive drawdown - come out stronger. Nothing structurally has changed in our view. For our longs, we are trying to pick long-term winners because of where these companies are positioned in the cycle,” said Jacoby.
Tabor has a list of approximately 450 TMTC companies globally which move in and out of the portfolio depending on not only where Jacoby and his team see the opportunity, but also the constraints that Tabor builds into its portfolio construction. Those constraints include, at the position sizing level, a maximum of 10% for the longs and 8% for the shorts; sub-sector exposure limited to 15% of the overall portfolio; and geographical exposure limited to at least 60% in North America, with a maximum of 25% Europe and a maximum of 15% in Asia. Tabor’s sub-sector risk limits helped it minimise trouble in the recent equity market drawdown.
“When stock movements are as drastic as they were in March and correlations spike to almost one, it’s not an environment in which stock selection works as well,” said Ankur Jain, Tabor’s Partner and Head of Business Development. “We took the book down from 210% exposure to 115% in a matter of days.”
Within the various constraints of the different exposures, Tabor looks at how exposed the individual stocks in its portfolio are to factors to ensure that it is managing exposure to other market participants as effectively as it can.
“There are many more hedge funds using quantitative or systematic approaches trading the market now than there were before and so factor exposures have become a much more important consideration for a discretionary equity manager when it comes to understanding their exposures,” said Jacoby. “We analyse our portfolio based on factors to ensure that we minimise our factor exposure.”
Tabor looks for idiosyncratic risk as another determinant for stock selection. Jacoby says that the type of stocks Tabor looks at helps them to achieve this goal.
“We’re very keen on positions where there is less crowding. Fishing where most of our peers aren’t enables us to reduce our correlation to the market"
“We invest in sectors that some find boring and not interesting,” he said. “But for us, we’re very keen on positions where there is less crowding. Fishing where most of our peers aren’t enables us to reduce our correlation to the market.”
One theme in the hedge fund industry to emerge from the ashes of the Global Financial Crisis is that institutional investors have become increasingly focused on the business part of a hedge fund; the operational due diligence aspect of manager screening and selection has grown in importance alongside the investment due diligence component. Jain says that Tabor recognises that, and he thinks their investment in this area will pay dividends in the medium-long term.
“We want to be thoughtful as entrepreneurs and business owners. We want to build Tabor correctly. We’ve built a very robust infrastructure with some high-profile service providers which we think is important,” said Jain. “There is going to be continued pressure from allocators on things like compliance and infrastructure, so being strong in these areas is critical because it matters to investors. They want institutional-grade organisations and we think we’ve built that.”
Tabor Asset Management is named after Mount Tabor, located in Lower Galilee, Israel. Mount Tabor is the site of a famous biblical battle between the unfavoured Israelite army and the much stronger Canaanite army; the Israelites were victorious. Jacoby sees parallels in terms of how Tabor approaches investing.
“We’re a comparatively new firm, but we have a disciplined alpha generation process and a strong risk framework,” he said. “These are what will help us generate better returns.”
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