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Net Net: Promoting innovation and managing change

Tilson Cuts Apple and Gets Long the Stock Market

Which Hedge Funds Are Making the Grade?

Following a year in which his hedge funds badly underperformed, investor Whitney Tilson has shed his stake in Apple and promised clients his decision to go solo would reap them benefits.

In his closely watched annual letter, Tilson said his Kase Fund - formerly T2 Partners before he split with Glenn Tongue last year - lost 1.7 percent compared to the total return of 16 percent.

He attributed the weakness to a highly correlated market that made divergences difficult to find. He also owned up to looking too hard for stocks to bet against - 25 in all - and not paying enough attention to his long exposure. (Read More: Dash for Trash Paying Off For Investors So Far)

"Managing so many positions spread me too thinly, which had two effects: our fund suffered losses that should have been avoided and, less visibly but perhaps more importantly, the amount of time I spent on shorts impacted my ability to find great longs," Tilson said.

Peter Foley | Bloomberg | Getty Images

"Reducing short exposure without materially changing long exposure of course results in a higher net long position, which means the fund should, in general, perform better in rising markets, but not as well during market declines," he added.

Of the top eight companies he expected to rise, only Apple fell, a move that prompted him to cut his losses on the battered shares.

Hedge funds overall underperformed the broader market but did turn in a gain of 7.3 percent and a 1.84 percent profit in the fourth quarter that beat the S&P 500, which declined 0.4 percent, according to industry tracker eVestment.

Managed futures was the only strategy that lost money for the year, while long-short and relative value were the best performers. (Read More: Hedge Fund Returns Worsen: Is 'Enormous Unraveling' Near?)

Tilson's long positions remain concentrated in Warren Buffett's Berkshire Hathaway along with American International Group, the Howard Hughes Corp, Citigroup, Goldman Sachs and eight others.

So far in 2013 Tilson's fund has performed well, thanks in good part to online video retailerNetflix, which has exploded 82 percent higher over the past month.

Looking forward, he said he wants to take his positions from about 62 percent long to closer to 80 percent, with no more than 30 percent short.

Tilson said the split with Tongue last summer means "my mind is clear and focused on the long term."

"The fund's returns have been dreadful for more than two years now, which I understand might make you question your investment with me," he said in the letter. "It's important for both investors (you) and investment managers (me) to understand that virtually all money managers will underperform at times, occasionally badly and for extended periods, yet the long-term results can still be excellent."