market folly

Whitney Tilson and Glenn Tongue's hedge fund T2 Partners is faring quite well in 2010, up 13.6% net of fees. They've taken a conservative position with their portfolio based on increasing concerns of a weak economy. As we've detailed in their previous presentation, they currently favor undervalued large-cap stocks. Their July letter to investors reveals that they are currently 100% long, 70% short, leaving them 30% net long. This is below the historical average for hedge funds and T2 Partners has taken such a position for two reasons.

Firstly, they're concerned about macro factors and cite Jeremy Grantham's recent letter. Vaguely speaking, they deduce that there are three possible economic scenarios at hand that can take place over the next 2-7 years.

1. A V-shaped recovery: A scenario where the stock market could compound 7-10%.
2. A 'muddle-through' economy: Stock market could compound at 2-5%.
3. A double-dip (or worse): Somewhat similar to what Japan's gone through, stocks could be anywhere from flat to way down.

Tilson and Tongue have built a conservative portfolio as the odds have shifted unfavorably as of late. They are long high quality large-caps such as Berkshire Hathaway (BRK.A), Anheuser-Busch InBev (BUD), and Microsoft (MSFT). They've also been long BP (in-depth analysis of BP here) and Liberty Acquisition Corp. warrants as special situations plays. Additionally, we've detailed T2's new position in Alloy (ALOY). While they like these names, their economic outlook has caused them to reduce longs and add to shorts.

Secondly, they cite numerous opportunities on the short side of the portfolio. When irrationality rears its head, T2 prefers to exploit the inefficiency. As such, they feel they can enhance their returns on this side of the portfolio. Some examples of current irrationality in their view include:

- VistaPrint (VPRT) still at $33 (it's now at $30 after the release of T2's letter). This is a classic 'growth gone bust' story and they are short.

- InterOil (IOC) at $60. We've detailed in the past how T2 feels that InterOil is a public relations hype machine, releasing news tidbit after news tidbit when fundamentally the company doesn't have a whole lot going on. They've been short for a while now.

- MBIA (MBI) at $8.68. They feel that bond insurers are in a precarious position given their struggles. Bill Ackman had previously been short this name and his investment was detailed in the book, Confidence Game: How a Hedge Fund Manager Called Wall Street's Bluff.

- The for-profit education sector. Like many other hedge funds, T2 has joined in on the negativity parade surrounding these stocks. While they don't disclose which specific companies they are short, it most likely includes a basket of these possible candidates: Apollo Group (APOL), ITT Educational (ESI), and Corinthian Colleges (COCO). For the elaborate thesis behind this play, check out Steve Eisman's short sale of for-profit education.


Overall, T2 has been adding to short positions and is increasingly focused on large-cap bluechips on the long side of their portfolio. Embedded below is T2 Partners July letter to investors:



You can download a .pdf copy here.

To hear many other hedge funds' latest investment ideas, Tilson will be presenting at the Value Investing Congress (special discount here) along with Bill Ackman, David Einhorn, Lee Ainslie, Kyle Bass, John Burbank, and many more.