market folly

Whitney Tilson and Glenn Tongue's hedge fund T2 Partners have had some rough sledding the past few months, mainly due to their large short exposure. Over the last five months, they are down 4.3% net while the S&P 500 has rallied 23.5%. As such, they've re-examined their portfolio construction and have concluded to reduce short exposure and get back to basics: buying cheap stocks.

Rationale for Reducing Short Exposure

Tilson cites the fund's maintenance of a large short book after the crisis as the primary mistake. Additionally he writes,

"Over time we've been quite successful shorting fads, frauds, promotions, declining businesses, and bad balance sheets. Where have had much less success, however, especially in recent months, is shorting good businesses that are growing rapidly, even when their valuations appear extreme. Such open-ended situations, regardless of valuation, are very dangerous, so going forward we will avoid them entirely unless we have a high degree of conviction about a specific, near-term catalyst."

The immediate thing that comes to mind is their well-documented short position in Netflix (NFLX). This short is obviously classified as a 'valuation short' but T2 notes that they are still digesting the company's recent earnings as well as other channel checks and it is unclear as to whether or not they've adjusted their position in anyway.

Buying Microsoft (MSFT) & Berkshire Hathaway (BRK.A)

Sticking to T2's 'back to basics' mantra, they've recently been adding to their positions in MSFT and BRK.A. You can see their analysis of Microsoft here and a summary of their other positions in their year-end letter.

Embedded below is T2 Partners' January 2011 letter to investors:



Be sure to also check out a ton of other hedge fund letters we've posted recently:

- John Paulson's year-end letter to investors
- David Einhorn's Greenlight Capital letter
- Summary of Kleinheinz Capital's letter
- Dan Arbess & Xerion Fund's 2011 strategy