Institutional Investor's Alpha Magazine - September 2008 - (Page 32)

Christopher Hohn lines and port connections on the East Coast. Above all, after a heady run of eye-catching returns, Hohn’s ﬂagship, the Children’s Investment Master Fund, is losing money. And Deutsche Börse is a very big reason why. With the global credit crisis hammering ﬁnancial stocks, the German exchange’s shares have plunged by more than half since January, dragging down the returns of TCI’s ﬂagship fund, which lost 12 percent through June 30 — a painful experience for a manager whose highly concentrated, longbiased portfolio had delivered net annualized returns of 42 percent in its ﬁrst four years through December 2007. All this has sent the thin-skinned, highly focused Hohn deep inside himself to question even the basics of his investment approach. His anxiety and self-doubt were laid bare this spring when, as part of the discovery process related to the CSX lawsuit, private e-mails between Hohn and his colleagues were made public, revealing the TCI founder’s fears about the credit crisis, his portfolio’s volatility and what he perceived as his team’s failures to anticipate price movements in their key positions. In March, Hohn even contemplated raising more capital, but wrote in an e-mail to TCI co-founder Patrick Degorce that “it may damage [TCI’s] long-term franchise.” Like many hedge fund managers, Hohn is not usually prone to self-doubt. He has led a largely charmed life since 2003, when he left Richard Perry’s New York–based hedge fund ﬁrm, Perry Capital, where he was a rising star. In January 2004 he launched TCI’s Master Fund with a then-sizable $500 million, attracting a who’s who of top foundations and endowments like Carnegie Corp. of New general meeting in June, but only after spending millions of dollars ﬁghting feverishly to bar him from the door. He has also been waging a longer but equally intense war with Tokyo-based utility Electric Power Development Co., better known as J-Power, trying to force its management to double the company’s dividend, appoint independent directors to its board and reduce its crossshareholdings with other Japanese corporations. In January, in an effort to increase pressure on management, TCI sought to raise its equity stake in J-Power from 9.9 percent to 20 percent — but in May the seemingly irresistible force of Hohn’s personality met an immovable object in the form of the Japanese government, which ﬂatly rejected TCI’s request, citing national security concerns. Unaccustomed to losing money and feeling the effects of battle fatigue, Hohn is rethinking his mission. He is also opening up. Starting this spring, Hohn agreed to a series of in-depth interviews with Alpha to discuss his investing philosophy, the true cost of TCI’s bruising proxy ﬁghts and the future of his ﬁrm. In the past Hohn’s unassailable belief in his own highly rational, well-researched investment ideas formed the foundation of his approach to risk management, but he now recognizes that he needs to be a better downside risk manager in turbulent global equity markets to protect his investors’ capital. “This has been a brutal period for long-biased investors like us, who have limited hedges, and it is painful to lose money,” says Hohn. “I think the key for us is to maintain our core philosophy of long-term investing. As long as we still believe in our positions, we won’t let the markets change our minds.” Still, Hohn is changing the way he operates. At an investor day held by TCI in New York in June for 300 of the ﬁrm’s clients, Hohn spoke at length about mitigating risk by diversifying his portfolio — investing at the margins of his fund’s 15 to 20 core positions and adding more names — as well as increasing the fund’s short positions from 10 percent to 15 percent of its net asset value. But the biggest bombshell he dropped that day was the news that he wants to be less of an activist going forward. “While we’re not going to rule out taking an activist stance on existing investments, like Deutsche Börse, we are going to be more cautious about it when we look at making new investments, because quite frankly activism is hard,” Hohn concedes to Alpha. “It has been very profitable for us, but it is unpredictable and expensive. Just look at CSX. We’ve already spent over a year trying to effect change and paid out more than $10 million in legal fees on the proxy ﬁght.” For a reclusive hedge fund manager who rarely gives interviews and loathes having his picture taken, Hohn’s newfound openness is stunning. But his change in strategy is less an abrupt shift than a retrenchment — a return to his roots. Hohn has always been a deep-value investor, a tireless researcher who makes tough and canny judgments. Lord Jacob Rothschild, whose son, Nathaniel, works for Atticus, once “Chris wanted a longer lockup that would force his prospective limited partners to self-select.” — STEVE BERGER, CO-FOUNDER, ADAMAS PARTNERS York and the Massachusetts Institute of Technology. Investors were willing to accept three- and ﬁve-year lockups and unusual fee structure: One third of TCI’s management fees go directly to the Children’s Investment Fund Foundation, a charity set up by Hohn and his wife, Jamie Cooper-Hohn, which she runs (see box). This year, however, Hohn is coming under enormous pressure as ﬁercely fought proxy battles and lawsuits have forced TCI into the spotlight. Since last fall Hohn has been locked in a struggle with Jacksonville, Florida–based CSX, whose CEO and board of directors have done everything in their power to neutralize TCI’s inﬂuence on other shareholders. Just this month, on September 15, CSX finally agreed to seat the four dissident directors elected to the board — including Hohn — at its annual 32 • INSTITUTIONAL INVESTOR’S ALPHA • SEPTEMBER 2008

Table of Contents Feed for the Digital Edition of Institutional Investor's Alpha Magazine - September 2008

Institutional Investor's Alpha Magazine - September 2008 Contents Letter from the Editor Longs & Shorts Pension Corner: Culling the Herd The Good Guys: Ending the Cycle Interview: Press Credentials Cover Story: Rethinking Chris Hohn Strategies: At the Edge of the Earth Profile: Alpha Femals Strategies: Tails, You Lose Research Center: The Top Equity Trading Firms Alpha Bytes: The Light Is On Unhedged: Commentary: Not-So-Dire Diagnosis

Institutional Investor's Alpha Magazine - September 2008

For optimal viewing of this digital publication, please enable JavaScript and then refresh the page. If you would like to try to load the digital publication without using Flash Player detection, please click here.