John Thaler’s JAT Capital is one of those hedge funds that make bold bets on their high conviction ideas. This usually leads to strong returns but there were periods when this long/short equity fund significantly underperformed the market as well. For example JAT Capital’s worst performing year was in 2012 when it lost 19%. The fund managed to recover its losses with a 30% gain the following year. Overall, JAT Capital’s picks performed much better than an average hedge fund. The fund lost 6% in 2008 but this was much better than the performance of other hedge funds and the S&P 500 Index.
JAT Capital was one of the top performing hedge funds in 2011 with a 17% gain when most equity hedge funds had negative returns. In this article we examined the performance of JAT Capital’s long stock picks that were in its 13F portfolio at the end of 2014. The fund had 35 equity positions in stocks with at least $1 billion in market cap and these stocks dominated the S&P 500 ETF (SPY)’s 0.9% gain by delivering a total return of 8.6% through the end of March despite large losses in Yahoo! Inc. (NASDAQ:YHOO) and Tesla Motors Inc (NASDAQ:TSLA). Twitter Inc (NYSE:TWTR), Netflix, Inc. (NASDAQ:NFLX), and LinkedIn Corp (NYSE:LNKD) were among JAT’s best performing picks during the first quarter.
We track hedge funds like JAT Capital because historically their stock picks managed to generate alpha. In our backtests the most popular large cap stocks among hedge funds delivered an annualized alpha of less than 1 percentage point whereas hedge funds’ most popular small-cap picks achieved to deliver nearly 10 percentage points in annual alpha. Our back tests covered the 1999-2012 period. We have also been tracking the performance of these small-cap stocks since the end of August 2012. They returned a mind blowing 137% over this 31 month period and outperformed the S&P 500 index funds by more than 82 percentage points (read the details here).
The biggest winner in JAT Captial’s portfolio was Twitter Inc (NYSE:TWTR).As of the beginning of 2015, JAT Capital held 7.2 million shares of Twitter Inc (NYSE:TWTR) at an investment of $260 million. Twitter Inc (NYSE:TWTR) was almost 10% of the firm’s portfolio and has been making recent headlines as the social media company appears ready to surpass Yahoo! Inc. (NASDAQ:YHOO) in online display advertising. But some might be viewing these social media giants as becoming a little too pricey as Twitter surged 39% in the first quarter of 2015. JAT Capital began cutting its stake in Twitter Inc (NYSE:TWTR) by 28% in the last quarter of 2014. It will be interesting to see what he does this quarter when we get the next round of filings.