The Sad Story of Sequoia Fund

To be clear, I’m not gloating with this article. Sequoia prior to recent events was a storied mutual fund with a solid track record. It is, however, now a case study in when risk management goes wrong, and when a 30% position blows up.

As of September 30, 2015 (Q3), Sequoia’s 5 year and 10 year relative performance vs. the S&P 500 was +2.16% and +2.75% respectively, according to That’s a solid track record of outperformance.

As of last Friday, November 6th, those 5 year and 10 year numbers are now -1.87% and -0.26%.

Their October 2015 performance was -9.03%, when the S&P 500 was up +8.44%.

That’s 10 years of solid history, done.

The culprit is Valeant Pharmaceuticals. I’m not going to harp on that story too much, since it’s already been covered extensively in the financial press. The point is though that Sequoia had nearly a 30% position in that one stock.

Even if Valeant turned out to be a squeaky clean company, a 30% position is just too much. Perhaps this would be excusable if Sequoia used puts “just in case” as a hedge. Forget about the fraud allegations either. Something as simple and routine as a surprise earnings miss on a 30% position could mean the difference between outperforming and underperforming for a quarter. Considering how short term people think (I’m not saying it’s good; I’m just realistic about the way the world works), that’s too much.

Side note, biotech has had an insane past two years prior to this recent downturn. Even if Valeant ends up being proven squeaky clean from an ethics standpoint, I’d still question a 30% position just based on valuation.

Sequoia is a long only equity manager. Perhaps nowadays that seems a little vanilla or “old fashioned” compared to, say, distressed debt, managed futures, or whatever hedge fund strategy is your favorite.

But, being a long only equity “buy and hold” fund still doesn’t mean that basic risk management doesn’t apply. Set position limits and rebalance accordingly. Have a sell discipline. Use stops if needed.

You know the old saying, “if you like a stock at 30, you should love it at 20?” It’s incomplete. As one of my mentors said, if you like a stock at 30 and it goes to 20, you should first go back and see if you were wrong at 30.

Two of the fund’s board members resigned, according to reports. What the fund needs to do now to keep investors is convince them that this is a one-off, and the fund’s successful history of long only equity management will play out in the future. Some funds have been able to pull it off. The Oppenheimer Core Bond Fund had a catastrophic 2008 and even got sued by a number of investors—but they’re still alive, and have $1.3 billion under management according to as of today.

If you’re reading this now in college or starting out in your career, keep these events in mind. As Warren Buffett once said, “It’s good to learn from your mistakes. It’s better to learn from other people’s mistakes.”

Keep hustling,

Alex Cook

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