How will hedge funds fare in the year ahead? As a sign of hope, fund managers have seen their private equity returns rise by 3% so far. But management fees remain high and investors are still eyeing stocks with caution.
Hedge funds are experiencing a rocky year. They have increased bets on private companies, but they are still losing money.
Hedge funds that choose stocks are rescuing the year by investing in private enterprises.
The portfolios of prominent managers who invest in both public and private firms in the same funds have been weakened by losses from January’s meme-stock rise and a pullback by fast-growing technology stocks. However, rising private company values and a strong IPO market in the United States have enhanced their private bets. This has enabled them disguise their bad performance in the public markets while also increasing their total returns.
According to persons familiar with the business, Dan Sundheim’s $25 billion D1 Capital Partners is down 4% in its public wagers for the year through September, but up 71 percent before fees in its private investments. For the time, the S&P 500 had a total return of 15.9%.
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D1 customers choose from a variety of share classes with varied degrees of exposure to private assets. After expenses, clients in the share class that may invest up to 15% in private firms had returns of roughly 4.5 percent throughout the time. Clients in share classes that may invest up to 35 percent and 50 percent in private firms saw increases of 14 percent and 21 percent, respectively.
Meanwhile, public investments in a hedge fund that may invest up to a quarter of its customers’ money in private firms were down 11.2 percent for Boston-based Whale Rock Capital Management, according to sources familiar with the fund. The fund’s private wagers helped to reduce the fund’s losses to 3.3 percent for the year through September.
Hedge funds that don’t have any private firms in their holdings have fared worse. According to sources familiar with Light Street Capital Management, which runs late-stage growth and other funds as well as a hedge fund that solely invests in public businesses, its hedge fund is down 18.6 percent for the year through September. As a result, the fund’s size has shrunk to about $1.7 billion. The firm’s growth funds have done far better, according to the sources, with Light Street’s first such fund, which includes Toast Inc., a restaurant software provider, and GitLab Inc., likely to have an internal rate of return of more than 100%.
The rush of public-market investors into private-equity investment has aided in the rise of private-equity values. And since hedge funds, mutual funds, and sovereign wealth funds invest billions of dollars, venture and growth funds are often crowded out.
According to a recent study by Goldman Sachs Group Inc., hedge funds raised 27 percent of the money raised in private rounds this year through June, while only participating in 4% of the transactions.
“These Internet businesses are developing enormously, and managers want to capture that massive exponential growth for their clients,” said Susan Webb, founder and investment chief of Appomattox Advisory, a New York-based outsourced investing company.
The potential for a greater return is clear. According to Goldman, private equity and venture capital strategies earned an average of 14.2 percent per year during the decade ending in 2020, while hedge funds had annual returns of half that—and were exposed to the strains of recurrent redemption cycles.
A Light Street Capital Management growth fund has invested in Toast, a restaurant software business that went public last month.
Associated Press photo/Richard Drew
According to Udi Grofman, worldwide co-head of the private-funds practice at Paul, Weiss, Rifkind, Wharton & Garrison LLP, hybrid funds may provide different advantages. “The beauty of the arrangement is that it enables investors’ cash to be exposed to public markets in between private investments,” Mr. Grofman said. Clients often have cash on hand to cover capital requests from venture and private equity groups.
Stock-picking hedge funds enjoyed a spectacular year in 2020, bolstered by markets that reached new highs after bottoming out in March of that year.
This year, their fortunes in the stock market have shifted. Many hedge funds lost money during the January meme-stock surge, which propelled the stock prices of businesses like GameStop Corp. and AMC Entertainment Holdings Inc. to new highs. Last year, Whale Rock rose 71%, while the D1 share class, which invests up to 15% of customers’ money in private firms, rose 60%; in January, they lost around 11% and 30%, respectively, in only their public assets.
Whale Rock and other growth-oriented stock pickers have failed to recoup their losses, while D1 has almost recovered. Sector rotations that favor growth or value have made it tougher to navigate markets, according to fund managers. Energy and financials, which have been out of favor for a long time, have been on fire.
In the meanwhile, private markets have remained supportive. The IPO market in the United States is booming, and firms are raising more money in private markets than ever before. The quick pace of fundraising is aided by hedge funds. According to PitchBook Data Inc., D1 and Tiger Global Management, which oversees a number of private-equity funds as well as a hybrid hedge fund, have engaged in private fundraising rounds at a rate of more than one transaction per week for D1 and more than two deals every three days for Tiger.
Mr. Sundheim, 44, said at a recent capital-introduction conference that he hadn’t planned to grow as large in private firms as he has. He launched D1 after many years as chief investment officer at Viking Global Investors. According to him, D1 has invested in 90 private enterprises.
He claimed that in public markets, judgment was the sole competitive advantage, but in private markets, enterprises’ reputations played a role in acquiring access to agreements. D1 operated as a resource to management teams in its early investments, he added, so they could serve as strong references for D1. Mr. Sundheim also expressed confidence in his public investment portfolio for the next three to five years.
Juliet Chung can be reached at [email protected]
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The “viking global private investments” is a hedge fund that has been around for over 20 years. It was founded by the Viking Global Management team, and it has been very successful in its time. The company is currently looking to expand further into Asia and Europe, but it has had a rocky year with the market.
Frequently Asked Questions
Is BlackRock a hedge fund or private equity?
A: A black rock is a type of igneous rock. It may be composed primarily of volcanic material, but it can also contain large amounts of sedimentary material.
Are hedge funds privately organized?
What is the average life of a hedge fund?
A: The average life of a hedge fund is around three years.
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