Jonathan Auerbach co-founded long/short equity fund Hound Partners with Scott McLellan in 2004, seeded by Tiger Management. Jonathan Auerbach had been a senior analyst at Ziff Brothers Investments before joining Tiger Management in 2004, when he was put in charge of a new umbrella fund, which became Hound Partners. Auerbach lured Scott McLellan to Tiger to help him run the fund. Prior to that, McLellan worked at Highbridge Capital. In 2007, Scott McLellan left to form Marble Arch Partners with Timothy Jenkins, who had spent three years working at Tiger Management. Jonathan Auerbach’s Hound Partners gained around 16 percent in 2013.
Arrow Capital Management, managed by Mal Serure, is “an alternative asset management firm focused on event-driven value investing, primarily in global public equities,” according to the firm. Mal Serure is a Bear Stearns alum, and Alex von Furstenberg–a former co-portfolio manager with the firm–has since moved on to found Ranger Global Advisors, a family office that manages over $1 billion in assets.
In their most recent 13F filings reflecting activity during the fourth quarter of 2013, the two hedge funds, Hound Partners and Arrow Capital Management, demonstrated some similarity in their holdings, including Valeant Pharmaceuticals International Inc. (NYSE:VRX), Carters Inc. (NYSE:CRI), Charter Communications Inc. (NASDAQ:CHTR), and Endo Pharmaceuticals Holdings (NASDAQ:ENDP). Other investments owned by both funds include W R Grace & Co. (NYSE:GRA), Transdigm Group Inc. (NYSE:TDG) and Tesoro Corp. (NYSE:TSO). Given the concentrated number of stocks in their portfolios (23 for Hound and 17 for Arrow), we thought the overlap was interesting and wanted to explore some of their common investments a little bit more closely. Hound’s portfolio had a striking similarity with Marble Arch’s investments, which was not surprising given the shared backgrounds of the two funds’ founders. However, there is no similar relationship between Jonathan Auerbach and Mal Serure, which makes their overlapping holdings even more intriguing.
Valeant Pharmaceuticals International Inc. (NYSE:VRX) was the top holding of Hound and second largest of Arrow. Hound maintained its position in the multinational specialty pharmaceutical company during the fourth quarter, while Arrow increased it by 5%. VRX has had a strong run over the past year, as its earnings have been boosted by its recent acquisition of eye care products maker Bausch & Lomb Holdings Inc.
Children apparel maker Carter Inc. (NYSE:CRI) was the second largest equity position of Hound and third largest of Arrow. Hound maintained its stake in the position, while Arrow reduced its stake by 30% during the fourth quarter. The stock has been volatile, with a disappointing earnings report in 3Q13 causing the price to drop precipitously in late October 2013, while a consensus-beating earnings release and forward guidance caused a similar rise in February 2014.
Endo Pharmaceuticals Holdings (NASDAQ:ENDP) was the 14th largest position of Hound and the fifth largest of Arrow. Hound increased its stake by 53% during the fourth quarter, while Arrow’s purchase was a new position. The stock had a great run over the past 12 months, appreciating by 145%, aided by a deal to acquire Canada’s Paladin Labs for $1.6 billion and a plan to re-domicile to Ireland, which will lower its tax rate.
Transdigm Group Inc. (NYSE:TDG) was 11th on the ranking for Hound and 10th for Arrow. Again, the former increased its stake in the aircraft component maker by 13% during the fourth quarter, while the latter’s position was a new purchase. The stock has recovered strongly since bottoming out in August, when it released disappointing earnings and forward guidance.