Valiant Capital Partners has started the fourth quarter strong.
The long-short fund headed by Tiger Grandcub Chris Hansen gained 4.96 percent in October and a further 5 percent or so in the first half of November. As a result, it is up 25.5 percent for the year through November 15, according to Valiant’s third-quarter client letter, obtained by Institutional Investor. The fund is now on a three-and-a-half-month roll, having racked up gains of 7.9 percent in August and 3.5 percent in September after a rough July.
“The rebound in performance was primarily the result of the conviction we had in our names (long and short) and our ability to stay patient and make good decisions throughout the painful July rotation/performance stretch,” Hansen said in the letter.
Valiant’s quarterly letters are always very detailed and provide insight into Hansen’s thinking as well as the fund’s performance drivers and positioning.
Through the first three quarters, longs added 27.8 percent to performance and shorts detracted by 9.1 percent. Hansen emphasized in the letter that in the third quarter Valiant “significantly increased” its exposure to the power sector, reminding clients that “this is the most compelling thematic investment theme I have seen in my 34 years in the business.”
II previously reported that in the firm’s second-quarter letter, Hansen told clients that during that period Valiant initiated new long positions in the power sector and created a side-pocket vehicle so investors could increase their exposure to those opportunities. The huge demands created by artificial intelligence are expected to have an enormous impact on the power industry in general.
“As we continue our work on artificial intelligence and the ongoing infrastructure investment cycle implications, we are increasingly excited about the investment opportunity posed by the U.S. power industry and associated value chain beyond the rising data center demand,” Hansen stated in that letter. “With AI as an accelerant, we appear to be at an inflection point in U.S. power consumption.”
In the latest letter, Hansen reminded investors Valiant is very excited about this sector for several reasons, including its size and liquidity as well as the large number of “super high-quality businesses with strong moats.” He stressed, “After not growing for the last two decades, growth is both accelerating and durable for at least a decade, with the skew to the upside.”
Hansen believes Valiant is perhaps more bullish about the sector’s prospects than most other investors, asserting that the firm has “the highest variant perception versus consensus it has ever had on a theme and many, if not most, of the stocks we own.” He added that valuations for the sector remain extremely cheap compared to the firm’s outlook.
At the same time, Hansen is guarded about the details of his investments in the sector, explaining, “Given the current edge we believe we have, we are reluctant to discuss the details and data points behind our work in a format as open as this letter.”
Despite the increased exposure to the power sector, Valiant stressed that the fund is “conservatively positioned and well protected” against market declines. In fact, Hansen asserted that equity valuations remain at very high levels and are “our greatest area of concern,” noting that the S&P 500 is currently trading at a “headline” price-to-earnings ratio of 23 times forward earnings and 45 percent above its average since 2000.
“More perplexing is that these valuations have [been] sustained and even increased despite the increase in nominal and real rates,” the letter added, “which are clearly in restrictive territory despite the recent Fed rate cuts.” Hansen said that the current long-short ratio puts the fund’s positioning “close to market-neutral after factoring in our index put option exposure.”
At the end of the third quarter, information technology represented more than 31 percent of net exposure, industrials upward of 14 percent, consumer discretionary stocks better than 12 percent, and utilities more than 8 percent.
Taiwan Semiconductor Manufacturing was the largest equity position, followed by Eli Lilly, Adidas, Core Scientific, and Microsoft. Core Scientific, which Valiant initiated in the second quarter as part of the power industry play, is a bitcoin miner that Hansen says has begun transitioning into a data center REIT.