Shannon River Hedge Fund Is Betting Big on News

(Bloomberg) -- Shannon River Capital Management, a $450 million technology-focused hedge fund that beat peers last year, says digital subscriptions for news are the next big thing.

“News is where music was 10 years ago,” Spencer Waxman, who founded Shannon River in 2003, said in a telephone interview. “At that time, no one thought you’d pay for music again.”

The New York-based firm’s biggest U.S. stock position as of the end of September was the New York Times Co., with a market value of about $44 million, according to a company filing. But the firm sees publishing as only one part of a broader strategy, which includes investing in software and payment companies and steering clear of FAANG stocks -- Facebook, Apple, Amazon and Google-parent Alphabet.

The fund gained 16 percent in 2018, according to a person familiar with the matter, while the industry on average fell 1 percent on an asset-weighted basis, Hedge Fund Research Inc. data show.

Waxman, who declined to comment on performance numbers, spoke with Bloomberg’s Shelly Hagan on Jan. 18. His comments have been edited and condensed.

Where are you seeing opportunities this year?

Software continues to be a dynamic and growing area. We especially like software companies within specific sectors whether that be insurance, retail or industrial. Information technology is another area where we have been active and it is looking more attractive now. Business IT budgets are not only increasing in number but also in priority, and households are spending more on it. So whether the economy is moderating or not, software won’t be impacted.

Content is another interesting area, whether that be news or entertainment. We think news is the next thing everyone -- especially young people -- will pay for. For example, we have a significant position in the New York Times, which is the most important brand on the planet and its management team is accelerating its digital strategy.

Do you invest in FAANG stocks?

We’re not interested in investing in them, but we follow them because they have broad implications for suppliers. For every letter in FAANG there is an ecosystem of diverse companies that provide investors less obvious ways to get exposure to established tech themes.

We feel the risk-reward is so much more attractive in small- and mid-cap stocks, or those with a market value of $1 billion to $10 billion. Being smaller, they have more identifiable catalysts and inflection points that are under-appreciated or misunderstood. If you look at the big challenges that technology broadly faces -- like data and privacy -- FAANG stocks are right in the way of that.

We also think the smartphone market is mature right now. If anything, we’ve been shorter on the supplier side of that market. Companies run so lean now that there is not much long-term visibility to suppliers. Whenever there is a slowdown in product sales, the supply chain gets hit.

How do you decide in which tech IPOs to invest?

Companies like Uber Technologies Inc., Airbnb Inc. and WeWork Cos. are getting all the attention and take so much mind share from the investing community. But there are a number of IPOs that are not in the mainstream. A good example is MuleSoft Inc. No one heard of the cloud-software maker until Salesforce.com Inc. bought it. We like companies that have an early lead and a large total addressable market and MuleSoft was that.

Another example is Bottomline Technologies de Inc. It’s in the payments business, an area we’ve been active in since the early days of the market. Both of these companies are good examples of longs that contributed to our 2018 performance.

What else contributed to your 2018 gains?

Yext Inc., PTC Inc. and SendGrid Inc. All three were very well situated in their respective sectors in software and had business-specific inflection points or transitions that we felt were under-appreciated.

We see a big opportunity in PTC going forward. Specifically, augmented reality, or AR, is going to be huge, so we’re interested in how this industrial software company is developing AR applications for its client base. There are so many use cases for AR across different verticals.

How can you beat others in tech who take risk-off approaches?

There’s much more dispersion in the areas we cover that larger firms are restricted to. The large firms are usually constrained to a small number of firms that correspond to their market caps. We run an active short book to capitalize on the volatility that creates winners and losers.

Where are you short?

On the short side, we stay in the same market cap and look for asymmetric situations where we think growth is priced in or hard to achieve.

In the supply chain area, we look for places where there is over-capacity. We’re also looking for sectors that are adversely affected by technological change. An example of this is distributors that are losing share to the internet and will face margin and growth pressures.

Read more in this week’s Hedge Fund Brief

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