Equity Hedge Fund Soars 30% by Buying Undervalued Tech Stocks

A $1.5 billion value-oriented equity hedge fund climbed 30% in the first half by buying tech stocks amid Covid-19 induced market dislocations and the return of volatility.

SQN Investors bet on companies focused on cloud computing and digital transformation, according to an investor letter. It has made 10 new investments this year, including software companies ServiceNow Inc., Zendesk Inc., Avalara Inc. and Five9 Inc., a March 31 regulatory filing shows. All were up in the first six months, with tax-compliance software maker Avalara rising the most at about 82%.

Founded in 2014 by former Vector Capital managing director Amish Mehta, SQN is among a handful of equity hedge funds that have posted double-digit gains this year. And it has outperformed its tech peers. Stock funds focused on that industry rose 12.7% through June, while equity funds overall fell 2.9%, according to Hedge Fund Research Inc.

Mehta and his team think that working remotely will be a long-term trend coming out of the pandemic and that companies need to adopt technologies that further enable it, according to the letter.

The Redwood City, California-based firm’s value investing strategy -- a discipline that has tripped up big money managers in recent years -- probably benefited from the pivot toward inexpensive shares at the end of May as recovery bets mounted. However, the shift was short-lived as growth stocks climbed again in June, and value lost ground.

Meanwhile, SQN is beefing up its staff. This month, Farouk Hussein joined the 15-person firm as a partner, according to the letter. Previously, he worked at HGGC, a middle-market private equity firm, where he led technology investments and focused on software, according to his LinkedIn profile.

SQN also promoted two analysts to partner: Jared Haftel, who worked with Mehta at Vector Capital, and Stephen Donnelly.

A spokesman for SQN declined to comment.

©2020 Bloomberg L.P.

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