Coatue May Start Fund After Missing Out on Netflix, Baidu Gains

(Bloomberg) -- Philippe Laffont, whose flagship hedge fund returned about 24 percent in 2017, is exploring new ways to structure Coatue Management’s investment vehicles after missing some dramatic, long-term returns in its technology portfolio.

Coatue would have had larger profits over several years had it not cut stakes in Tencent Holdings Ltd., Netflix Inc. and Baidu Inc. to rebalance risk, Laffont wrote in a letter seen by Bloomberg. His lament comes even as Coatue’s $8.9 billion flagship fund outperformed its peers in 2017 and rose 9.9 percent in January.

“By being ‘good risk managers,’ and selling our winners to ‘deworsefy’ our portfolios, we now own significantly fewer shares in some of the biggest winners,” Laffont wrote in the letter to clients dated Feb. 16. The missed opportunities have pushed Coatue to consider starting a side fund with a “quasi-evergreen” structure that could maintain such positions even when Coatue’s hedge fund has to sell.

Laffont also joined a chorus of hedge fund managers lauding Twitter Inc., one of the firm’s largest investments. He said Coatue sees parallels between the American social media giant and Chinese news aggregator Toutiao, a company it’s invested in through one of its private equity funds.

“We believe Twitter can transform its product experience by adopting the Toutiao play book, attracting new users with a simpler product and increasing engagement of its existing base,” he wrote.

Other highlights:

• Laffont defended Coatue’s decision to maintain a high net exposure last year, even as cracks started to appear in global stock markets. “The market continues to extend life-lines to structural losers and chase unsustainable bubbles -- we deliberately elected not to swim against the tide,” he wrote.
• The firm has been holding equity index put options to protect against a market selloff and “monetized a substantial portion” of this protection when volatility spiked earlier this month, according to the letter.

To contact the reporter on this story: Simone Foxman in New York at sfoxman4@bloomberg.net.

To contact the editors responsible for this story: Margaret Collins at mcollins45@bloomberg.net, Vincent Bielski, Josh Friedman

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