Hedge fund Hound Partners, founded in 2004 by Jonathan Auerbach and seeded by Julian Robertson Jr., on Monday filed a lawsuit in New York State Supreme Court seeking to invalidate its seeding contract. Hound had informed Tiger on August 19 of its plan. The complaint claims that while Hound has “the right to terminate the Agreement at will, . . . in any case Tiger’s material breach of the marketing provision gives [Hound] the right to terminate.”
Under the seeding deal, Robertson, who died in 2022, and his firm, Tiger Management, invested a total of $23 million in Hound’s long-short hedge funds. In return, each year Tiger would receive 12 percent of gross incentive allocations. But Hound, like all funds seeded by Robertson, would also benefit from introductions to his well-heeled cadre of clients and friends.
Over the years, Tiger Management received more than $155 million from Hound, according to the lawsuit. Hound, however, alleges that Tiger has breached its part of the deal in recent years. Seeding arrangements generally provide capital and support to new hedge funds in return for a cut of revenue or profits — if the fund succeeds.
Among other things, Hound’s complaint provides in-depth details on marketing.
“Since 2021, Hound has repeatedly objected to Tiger’s failure to fulfill its marketing obligations,” Hound states in court documents. “Tiger has responded by refusing to make marketing efforts while simultaneously denying — against all observable reality — that there is anything wrong with its lack of effort.”
Specifically, Hound says Tiger provided 14 referrals to Hound in 2014 and nine in 2015. But it gave just one in 2016, one in 2017, and none in 2018. “In 2020, Tiger failed to provide Hound with a single marketing contact,” Hound notes.
Tiger did introduce Hound to a “well-known hedge fund manager” in 2021 after Hound sent a letter objecting to a lack of marketing efforts, but the individual did not invest with Hound.
Hound says that in 2022 Tiger failed to provide any marketing contacts and that in 2023, after Hound again raised Tiger’s lack of marketing efforts, “Tiger purported to offer a single ‘introduction’” to one of Hound’s own former investors that Tiger had already referred years earlier, the lawsuit states. “Since that ‘introduction’ in 2023, Tiger has not provided a single additional referral or marketed Hound in any other way,” the lawsuit adds.
In a counter-lawsuit, Tiger Management wrote “Mr. Auerbach gave his word and signed a contract that granted him $23 million in seed funding from Mr. Robertson and the transformative benefits of being a Tiger seed, establishing his first-ever fund upon the foundation of Mr. Robertson’s seal of approval and reputation. The deal that Mr. Auerbach signed expressly stated that, even after Mr. Robertson’s passing, the revenue share is owed to “Mr. Robertson’s heirs or any of their respective affiliates or Designee.”
“There is no legal or factual basis for Defendants to terminate the parties’ contract,” Tiger asserts. “The agreement does not contain a termination provision, express or implied. And Tiger has not breached the agreement in any way, much less in a material fashion that would excuse Hound from paying Tiger its revenue share.”
Tiger accuses Auerbach of “executing” on his termination plan after Robertson’s death. “Although the assistance Tiger provided to Hound had not changed for years, Defendants began falsely accusing Tiger of breaching the parties’ agreement by not exercising its reasonable efforts, consistent with what it has done for other Tiger-seeded funds, to assist Hound with marketing,” the lawsuit claims. “To be clear, this is all pretext, plainly manufactured in an effort to justify violating the revenue share obligation that Defendants eagerly assumed when they sought Tiger’s seed capital and endorsement. Defendants’ contrived complaints culminated in their unilateral and baseless ‘termination’ of the parties’ agreement.”
Tiger added in the complaint, “Mr. Robertson took a chance on Mr. Auerbach when he had no track record and continued to support him even during stretches of underperformance. Hound’s own marketing deck promotes Tiger as core to its DNA.”
Furthermore, Tiger’s claim notes: “It is also no coincidence that Defendants’ purported termination comes in the first year in many years that Tiger is entitled to a significantly higher revenue share.”
Hound is one of the oldest surviving Tiger Seeds. At the end of 2023, it managed $2.16 billion, according to a regulatory filing. Its assets under management peaked at $5.4 billion in August 2015. It generated double-digit gains in nine of its first ten years. But it lost about 38 percent in the 2008 financial crisis — and posted mostly mediocre performance in the ensuing years.
Several years ago, Hound closed down two long-only funds. About the same time, it launched the Variable Beta Funds, which have a short-biased strategy. They seek to generate capital appreciation and alpha, or relative outperformance compared to market indices, through short-selling, per the regulatory filing.
Hound Partners Variable Beta Master’s core portfolio generally consists of 30 to 40 short positions, which will typically mirror the short positions held by the long-short funds. The portfolio may also have long exposure through futures contracts, exchange-traded funds, or other instruments related to the S&P 500 Index and the Russell 2000 Index. In its lawsuit, Hound says its hedge funds were up 23.3 percent for the 12 months ended June 2024 and its Variable Beta Fund was up 38.6 percent.