'The middle innings of frothy speculation': A $3.4 billion hedge fund is sounding the alarm

Keith Williamson via Flickr

• Tourbillon Capital is a $3.4 billion New York hedge fund led by Jason Karp.
• The fund has lost money in its flagship fund, but says despite the bull market, there are still stock-picking opportunities; it just requires patience.

Jason Karp, the head of $3.4 billion hedge fund firm Tourbillon Capital, is preaching patience.

The firm's flagship Global Master fund has lost money in 2017. And in an October letter to investors, Karp leads with a quote from author David G. Allen. The quote reads:

"Patience is the calm acceptance that things can happen in a different order than the one you have in mind."

The firm's global master fund had a net return of -1.3% in the third quarter, according to the letter, and is now down about 3% for the year. Its long-only fund is up about 10% this year.

In an introduction, Karp said the firm is seeing "a number of warning signs that point to the middle innings of frothy speculation." He cited:

• "The valuation spreads between growth (people are heavily overpaying for growth and quality) and value (one of the cheapest vs. growth ever)
• "The unprecedented inflows into illiquid assets (private equity, VC, art, wine, etc.).
• "The 500% appreciation of Bitcoin and the dozens of "cryptocurrency" hedge funds that have all launched in the last six months,
• "The amazingly low volatility perpetuated by investment vehicles that sell volatility to enhance what is already the lowest yield environment in several thousand years."

These comments echo earlier letters, which have discussed the challenges of managing money in the current bull market. In the October letter, Karp added that despite this, there are investment opportunities for those willing to look "ugly" for some period of time.

He cited examples of stocks which underperformed "for just long enough to cause abandonment (usually 18-months to 3 years)."

"Then with a little spark, there is a staggering, abrupt move," he said.

He cited Baidu, which gained 39% in the third quarter, and GM, which gained 43% in five months. And the letter identified a number of investment ideas: Fleetcor, Vantiv, Softbank, eBay.

"Although it feels as though there has never been a harder time to fight the consensus, remain low-net and avoid the all-too-easy trends, we also believe there has never been a more important time to have patience," the letter said.

Fleetcor is up about 14.6%, Vantiv is up 8.8%, Softbank is up 11.6% and eBay is up 6.5% from June 30 through the morning of November 3, according to Bloomberg data.

Tourbillon had $2.7 billion in hedge fund assets as of mid-year, per the Absolute Return Billion Dollar Club ranking. It manages about $3.4 billion firmwide.

Before launching Tourbillon, Karp was a portfolio manager at Steve Cohen's SAC Capital and a co-chief investment officer at Carlson Capital.