Invest Like the Best: Jason Karp


About Jason: Founder and CIO of Tourbillon Capital Partners

Growth of private markets

  • Smaller supply of scalable opportunities and increased competition
    • Less companies going public and staying private for longer. 50% of listed companies compared to 20 years ago (mostly M&A and lack of IPOs as opposed to bankruptcy)
    • Unicorns able to get unprecedented amount of private funding
  • Increasingly competitive public markets for short term performance.
    • Data from prime brokers shows that over 90% of flows driven by non-discretionary accounts (CTA, systematic, quant, passive).
      • He argues that this has caused large dislocation opportunities in past 5 years in valuations when historically values typically take no longer than 3-5 years to converge to fair valuations.
    • Short term pressures on advisors (quarterly performance, fee compression) incentivize move away from mark-to-market and costs of wooing performance-chasing allocators.
    • Information edges are gone or not scalable
      • Data points include the sheer number of funds and books referencing ‘value’ investing.
      • Growth of quant platforms like Quantopian.
      • The growth of data sets favors short term trading which is the domain of quants.
      • Ratio of sell side analysts to public stocks is at an all-time high
      • Reg FD neutralized many active managers’ edge b/c large commission paying funds could no longer get privileged info

How to compete in a competitive, expensive market

  • Look for real business growth. If a company is growing faster than it’s implied multiple there is a margin of safety that can ensure an investment in the event of multiple contraction
  • The deep value game is difficult since it’s a basket of adverse selection. A small minority will turnaround their distressed situation. It’s easier to look for ‘value’ names that are growing than it is to pick ‘deep’ value names to revert
  • Align investors with long term horizon as a structural edge. The only way to profit from longer-term dislocations. The current environment has a historic high correlation of growth to momentum which is a trend that continues to pay off, in turn, reinforcing the exit of value flows and increase in quant/momentum flows setting up a historic relative value opportunity.
  • Understand cyclicality and stickiness- He calibrates the riskiness of a business with the nature of its sales. Stickier businesses are less risky (ie high consumer daily engagement)
    • Fashion is unpredictable
    • Cyclical’s are dependent on GDP
    • Staples are more dependable

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