Hkuppy and Risk Management: How Returns Lie
Between 2016 and 2021 ARKK climbed 600% with a CAGR of 44%, declining 75% in the following 2 years. Similarly, Bill Hwang’s Archegos Capital Management grew from $200m to $20B in 8 years before exploding in spectacular fashion in 2021. As anyone with a basic understanding of finance knows there is a risk/return correlation that allows you to potentially juice your returns by taking more risk such as speculation, concentration or leverage. In spite of this the finance world regularly uses short term returns as an indicator of credibility and skill. I want to look at why returns can tell a false story using the example of the polarising Hkuppy, then identify how we can separate the Warren Buffet`s from the Cathy Wood’s of the world.
Harris Kupperman (Hkuppy) is a prominent, outspoken fund manager with over $200m under management. Kuppy’s short term results are nothing short of phenomenal, with yearly returns of 16%, 182%, 162% and 19% since inception in 2019. Naturally Kuppy has received a huge amount of praise for these returns, however I would like to offer another perspective. I’d like to note that Kuppy is clearly a gifted stock picker with a knack for putting up incredible returns, however I feel like there is another side to his results that need to be explored.
Let's imagine 2 buckets of 1000 fund managers both with an equal expected yearly return of 1.15 over 8 years. The low volatility low return bucket gets this with an 80% chance of a 20% increase and a 20% chance of a 10% decrease. Meanwhile the high vol high return bucket gets a 60% chance of an 90% increase and a 40% chance of a complete blowup 95% drawdown. TLDR: the high vol bucket has higher upside but also higher drawdowns. I simulated this on excel to demonstrate.
The low vol strategy ends up putting up decent returns. While there’s some outliers, the majority of funds end up making a bit of money over the 7 year period and even those who don’t succeed limit their downside. Let's contrast this to the high vol strategy.
The high vol strategy is tragic. After 5 years 65% of the funds have blown up (down more than 50%). After 8 years this number goes to 90%. However there is a lucky 10% who get a solid market beating 3x on their money and an even luckier 1.5% who increase their funds by over 100x. Those 1.5% must be geniuses, right? Or just a statistical byproduct of being the lucky bunch from a high risk high return strategy basket that is objectively investing irresponsibly. Obviously this is an extreme and hyperbolic example however it illustrates the maths of how mediocre managers can put up ultra high returns and why that can be a big red flag.
When a fund manager puts up multiple years of significantly above average returns we need to be wary, as those returns are incredibly difficult to achieve with decent risk management. However there are outliers such as Buffet who have put together strings of high double digit returns while still practising smart risk management. Hell, Renaissance Technologies averaged 70% per year for 2 decades. So how should we differentiate between the Buffets and the Cathy Woods of the world?
The first thing to look at is track record. Even at 40 Buffett had around 14 years of significantly above market returns. So let's have a look at Kuppy’s record. His current fund, while exceptional, only goes back to 2019. Even at the best of times this isn’t a long track record, however is even less illustrative considering how unprecedented the last few years have been in the market. Before starting his current fund Kuppy ran two funds from 2003-2008 and 2011 onwards. In 2011 Kuppy raised a large amount of capital to invest in mongolian real estate. As seen in the price chart, the company collapsed within 4 years as mongolian real estate tanked. Before starting Mongolian Growth Group Kuppy ran another fund. This is going to be more speculative as there is seemingly little information online about the fund however it’s generally understood that after putting up phenomenal returns the fund blew up investing in gold miners and Kuppy closed it (this is just what I’ve read, I can’t confirm). Even if this isn’t entirely true it’s impossible to say as Kuppy has seemingly scrubbed the internet of all information about his old fund. Put in this context with his history, his current returns actually look a bit scary as he seems to have an issue with managing risk effectively.
The second thing we should look at is portfolio management and self-reflection. There’s always the chance that he’s learnt and not making the mistakes of the past. Currently Kuppy basically only has 4 investments: Uranium, Oil and oil services, St Joe and Legacy to Digital transformations. Without making any judgements on these positions this in itself is a red flag. While it may work out, the level of concentration Kuppy uses is extremely risky as any individual position has the potential to significantly impair returns. Furthermore, while I have no opinion on two positions, seemingly over 30% of his fund is essentially in uranium exposure. As far as ideologically driven, speculative commodities uranium is almost certainly at the top and has been a widowmaker for many in the past.
To be clear I’m not saying that these investments won’t work out for him, and I’m not saying there's anything wrong with that style of investing. It’s very clear that he is comfortable taking a large amount of risk and I would assume those in his fund are comfortable with that as well. I’m just advocating for people to understand where his returns come from and potentially avoid leaning on them to build some sort of credibility or clout that potentially isn’t deserved.
While this article has been heavily targeted at Kuppy, he’s just a good example of what I perceive to be a blight on the finance industry. In fact a big part of writing this blog is as a way to document my track record and hold myself accountable in the future. While high returns are good, it’s essential that we contextualise them within a broader track record and strategy. Whether it’s Cathy Wood with speculation, Bill Hwang with leverage or Kuppy with concentration we need to be aware of the ways fund managers can juice their results and how returns can lie.