Big Stock-Picking Hedge Funds Suffer Brutal Reversal in 2022’s Market Tumult

(Bloomberg) -- Year after year, the largest hedge funds that sprung from Julian Robertson’s Tiger Management posted stellar results. But in 2022, they’re losing money on both of their favored trades: Technology giants and unicorns. 

Chase Coleman, Philippe Laffont and Andreas Halvorsen -- so-called Tiger cubs -- all rode long positions in the tech sector as valuations climbed, only to suffer as sentiment shifted amid volatile markets. The change seemed to have caught their funds by surprise, with their short positions not enough to outpace the declines. 

Coleman’s Tiger Global Management saw its hedge fund plunge 34% in the first three months of the year, while Laffont’s Coatue Management and Halvorsen’s Viking Global Investors fell 9.9% and 7.9%, respectively. Another Tiger offshoot, D1 Capital Partners, sank 16% in that time. Unusually, Tiger Global and D1 said they wrote down some of their private investments alongside their public market losses.

Some investors said the megafunds failed to catch the market rotation spurred by inflation worries and a war in Europe, and that their size prevented them from being nimble. As a result, many ended up being stuck on the wrong side of numerous trades. 

“The thing that worked extremely well for the largest TMT-focused equity managers historically -- betting big on tech companies, both public and private ones -- is going to be a big reason why they’re under-performing this year,” said Jon Caplis, chief executive officer of hedge fund consultant and data provider PivotalPath. Its Equity Sector Technology/Media/Telecom Index is down an estimated 8.8% for the first quarter.

The tech-heavy Nasdaq 100 entered a bear-market decline of 20% in the first quarter, though losses were pared at the end of March. The S&P 500 Growth Index fell 8.8% in the first three months. All five FAANGS -- Facebook parent Meta Platforms Inc., Apple Inc., Amazon.com Inc., Netflix Inc. and Google-parent Alphabet Inc. -- were in the red, and two of them plunged by more than 30%.  

Read more: Losing 5% Was Best You Could Do in Stocks and Bonds This Quarter

All six of Tiger Global’s biggest stock holdings at year-end, including JD.com Inc. and Microsoft Corp., fell this year, most by double digits. Coatue and D1 were hit by their large holdings in Rivian Automotive Inc., which dropped 52%. As of December, Microsoft and Amazon were among the 10 largest U.S. stock holdings for Viking, D1 and another Tiger cub-run firm, Lone Pine Capital. 

Another tech-focused investor, Gabe Plotkin, also had a rough first quarter, losing 21% in his $10 billion Melvin Capital Management. That followed a disastrous 2021, when the New York-based firm tumbled 39%.

Plotkin worked for billionaire Steve Cohen before founding Melvin in late 2014, and he was one of the best-performing stock pickers until last year, when the fund’s short positions were hammered by a Reddit-inspired short squeeze. Cohen’s Point72 Asset Management and Ken Griffin’s Citadel together invested $2.75 billion in Melvin last January as the fund plunged. The two firms have since asked to withdraw almost all that money.

Private Wagers

Among the losses at D1 Capital -- founded by Viking veteran Dan Sundheim -- were a markdown of its holdings in Instacart, which last month slashed its own valuation by 40%. 

Instacart’s struggles illustrate the broader issues for the equity hedge fund firms, which in recent years have pushed into venture capital investing and added private wagers as a way to bolster performance. D1’s hedge fund was up 26% in 2021, powered by a 70% gain in its private holdings as its public portfolio fell 8%, while at Tiger Global, the hedge fund’s 7% decline last year compared with a 54% rise in its Private Investment Partners funds.

But the private holdings could prove problematic if investors want to leave and the closely held companies are marked down; Coatue recently told exiting investors they won’t get back their cash that is invested in privates. 

Tiger Global’s managers “adjusted valuations down” for the fund’s private investments to account for pressure on their public-market peers, they said in the letter to clients last week. The fund owns shares of private companies including ByteDance, Stripe, Checkout and Databricks. It’s unclear what those mark downs mean for Tiger Global’s venture business, which had assets of $65 billion at year’s end.

One Tiger offshoot that bucked the trend was Karthik Sarma’s SRS Investment Management. The roughly $8 billion firm ended the quarter up 9.6%, thanks in large part to a monster bet on Avis Budget Group Inc. Sarma worked at Tiger Global for five years before starting his own firm.

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