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To select investments, the hedge fund Tala Investments LP uses a three-pronged approach, according to founder Naveen Jeereddi. “We identify what we’re going to look at, what we’re going to analyze, and where we are fishing,” Jeereddi told students during the final installment of the Hedge Fund Lecture Series, presented March 8 by the Evening MBA and Weekend MBA Programs at Gleacher Center.
In identifying investments, Tala looks for “event-driven processes,” he said. “We’re looking for something that creates a significant misunderstanding in the pricing of the security,” Jeereddi said. “We’re also looking for general bargains. Sometimes they’re just cheap stocks. Even though event-driven processes tend not to apply to them, emerging markets are fascinating and great places to invest. Sometimes there are call options in our portfolio—something that is completely mispriced for a structural reason, where we admit that the downside is significant but the upside, frankly, makes it an attractive risk reward.”
Even before valuation begins, Tala usually knows whatever it is evaluating is likely mispriced, he said. “You already know there is something going on, so when you’re looking at it, you’re really trying to figure out what is important in your analysis and whether it’s knowable,” Jeereddi said. “Because if it’s not important or knowable, as a value investor you don’t want to waste your time with it. You’re going to spend a ton of time on it and you’re not going to be able to develop any confidence on it.”
In the end, Tala hopes to assess value in multiple metrics, he said. “Think of it on book earnings, cash flow, private market basis, asset liquidation basis,” Jeereddi said. “Think of it in multiple different ways and different ranges. If you think through all that and you still think it’s an attractive investment, you’re definitely going to be more likely to get it right by getting it right on a number of metrics. The biggest problem with most investors is they pick one metric.”
In building its portfolio, Tala eschews geography, exposure, and other factors for simply accumulating great value, he said. “If it’s in distressed debts, that means we’re going to go to distressed debts,” Jeereddi said. “If it’s in equities, we’re going to go into equities. Right now we’re split. About 40 percent of our portfolio is in U.S. securities. The rest of it is mostly in Europe, with some in Asia.”
The Hedge Fund Lecture Series was designed to provide students with an overview of the industry, including exposure to leading hedge fund managers, said Michael Harron, a guest speaker who coordinates an annual lecture series on hedge funds. “These are portfolio managers who are not only really successful as investors and in their particular investment strategy, but also successful entrepreneurs who’ve built stable and growing businesses.”
—Phil Rockrohr