Robert Citrone’s Discovery Capital Management is the latest macro manager to cut its long equity portfolio.
The Tiger Cub told clients in his January monthly letter, obtained by Institutional Investor, that the firm halved its net equity exposure, to 25 percent from a peak of 50 percent just at year-end, “with the goal to get flat to short in the coming weeks primarily in developed markets.”
Citrone has been saying he expects a stock market correction of 5 to 7 percent. Although this would not be a large sell-off, he believes it is meaningful enough to reduce risk and potentially be short.
Discovery is a combination macro trader and equities specialist. It was up about 2.9 percent in January and is coming off one of the best two-year stretches among all hedge funds, with gains of 52 percent in 2024 and 48 percent in 2023.
Citrone thinks the market is expensive in historical terms, especially relative to interest rates. Yet a vast majority of investors throughout the world are long corporate America, whether it be venture, private equity, private credit, long-only equity, or credit long-short hedge funds, even as we enter tariff uncertainty and no more Fed cuts are expected in the near term.
“The catalyst for a potential correction is valuations, sticky inflation that we believe will pressure ten-year yields back toward 5 percent, and uncertainty around tariffs and expenditure cuts by [Elon] Musk,” Citrone stated in the letter.
Meanwhile, DeepSeek has thrown into question the huge amount of money being spent on large language models, Citrone notes. He believes capital expenditures will begin to fall soon as rates of return are not there. In the letter, he said Discovery has “shifted” its exposure within the artificial intelligence theme in light of recent developments. “The end of January was marked by a changing AI narrative as markets processed the debut of China’s DeepSeek model,” he explained. “This model reportedly developed at a fraction of the cost and energy consumption of other AI systems, [raising] questions about AI valuations and the long-term power demands. We believe this signals the early stages of AI’s commoditization, which will have far-reaching implications for the broader ecosystem.”
Instead, according to the monthly letter, Discovery believes its long exposure to Latin America, Nigeria, and Turkey “will provide differentiated returns, as will our shorts.”
Discovery is invested in Nigeria across credit and currencies. The driver of Discovery’s Latam strategy continues to be Argentina, where the firm is invested in equities and sovereign bonds denominated in both U.S. dollars and pesos, the letter says. Discovery is also invested in Mexican equities, where it is again increasing positions while maintaining a smaller exposure to Venezuela, Peru, and Ecuador.
In the U.S. Discovery is short select equity structural shorts in financials, TMT, and consumers. Its longs are aimed at financials, industrials, TMT, materials, and energy, as well as corporate credit.
The firm is long the dollar primarily versus the Chinese renminbi and the Taiwan dollar. At the same time, it is short in China through equities, currencies, and rates, as well as equities and currencies in Hong Kong and currencies in Taiwan.
And last, Discovery is short in Europe primarily through index exposure to subordinated bank debt and in Japan across select equities and rates.