Hedge Funds Are Collapsing
However, there's still a silver lining
Last week, it was announced that Tiger Legatus, a hedge fund with $203 million in AUM, was shutting down after 13 years in business. Famed investor Julian Robertson, father of the Tiger Cubs, had helped provide the fund with capital.
In a letter, Tiger Legatus founder Jesse Ro informed investors that his fund had not delivered acceptable returns. Ro had previously worked at Andreas Halvorsen’s Viking Global as an analyst and portfolio manager. Halvorsen is recognized as one of the most successful Tiger Cubs.
Oddly enough, Tiger Legatus only declined by 2.8% during Q1, outperforming the S&P 500’s loss of 5.5%. In 2021, the hedge fund declined by 1%.
Of the $203 million in AUM, only $62 million was attributed to managed 13F securities. As a result, a liquidation of the fund should not pose major problems for the stock market or emit market-wide ripple effects.
Tiger Legatus operated under a heavy-conviction and highly-concentrated strategy, much like members of the Tiger Cubs. The fund carried an average holding period of 5.17 quarters for stocks in its 12-position 13F portfolio as of Q1. In addition, its top ten holdings accounted for 98.31% of its portfolio:
Hedge Funds Sell At Record Levels
There’s no doubt that hedge funds are cautious about the state of the market right now. From June 10 to June 13 (June 11 and 12 fell on the weekend), the dollar amount of selling among hedge funds rose to its highest level since Goldman Sachs’ prime broker began tracking the statistic in 2008.
The sales were driven by a higher than expected May CPI reading of 8.6%, the highest inflation figure in over 40 years. The increase in interest rates to curb inflation has created fear among investors as well.
On top of that, hedge funds have reduced their equity exposure significantly. According to Goldman, hedge fund exposure, which tracks both long and short positions, are near five-year lows. Short sales among hedge funds have also climbed “aggressively” higher.
ADG Capital Management - Hasan Abdat
Meanwhile, it was announced that ADG, a London-based quant fund, would be shutting down as well. After 9 years in business, ADG will be returning its capital to investors due to “losses and outflows this year.”
During Q1, the fund returned a loss of 13.7%. At its peak, the fund managed upwards of $3 billion and traded stocks, bonds, and currencies.
As stated on its official website:
“Our strategy uses fundamental and economic inputs to take directional, but primarily relative, value positions across global stocks, global bonds and FX markets. Combining a robust risk management framework we offer a return profile that has consistently shown low correlation to conventional asset classes and other investment strategies.”
ADG has not filed a 13F form to the SEC, so its positions are unknown.
Three Arrows Capital (3AC) - Su Zhu & Kyle Davies
3AC is a crypto-focused hedge fund founded in 2012 by Columbia University grads Su Zhu and Kyle Davies. Back then, the two childhood friends started the fund with just $1.2 million in initial capital. As of April, the fund was reported to have $3 billion in AUM.
With the extent of the decline of the crypto market, however, 3AC is facing margin calls from its lenders, which include BlockFi and BitMEX. To be clear, the hedge fund has not yet shut down, but it is currently facing heavy liquidity and insolvency issues.
A whistleblower on the Terra Community forum stated that 3AC had purchased a total of 10.9 million of locked LUNC worth almost $560 million. Co-founder Kyle Davies acknowledged that the fund had purchased roughly $200 million of LUNC in a $1 billion token sale by the Luna Foundation. $560 million of LUNC is worth $670.45 today. Other crypto investments held by 3AC include SOL, DOT, UNI, WOO, and several private investments in crypto-related companies.
3AC also faced forced liquidations last week after Bitcoin and Ethereum sank lower to prices not seen since December of 2020. Since the start of Q2, more than $1 trillion has been wiped away from the crypto market. As of June 17, the entire crypto market had a market capitalization of $910 billion.
Davies has stated that 3AC is currently weighing its options, which include asset sales or a bailout by another firm. 3AC is also trying to negotiate terms with its lenders. All in all, things don’t look so good for the crypto hedge fund.
Melvin Capital - Gabe Plotkin
Melvin Capital announced its closing in May following a domino effect of heavy losses since its GameStop short during Q1 of last year. During then, GameStop ballooned to as high as $483, and Plotkin’s fund may have been the worst hit due to its outsized short position. In January, Melvin plummeted by 53% and lost $6.8 billion in one month. Luckily, the fund received a $2.75 billion bailout from Ken Griffin and Steven Cohen. Melvin ended the year down 39%.
As of the end of April, the hedge fund was down 23% year-to-date and had $7.8 billion in AUM. At the start of 2021, it managed $12.5 billion.
Furthermore, Plotkin explained that his fund had already raised a lot of cash and begun unwinding its positions as of May. It’s likely that Melvin’s liquidation has already been complete, or is mostly complete.
It wasn’t always like this for Plotkin. From its inception in 2014 to 2020, Melvin returned an average annual return of 30%. From 2014 to May of 2022, the fund returned an average annual return of 11.9%.
Here are Melvin Capital’s top positions as of Q1:
Tiger Cubs Battered in 2022
Tiger Cubs, like Chase Coleman’s Tiger Global, Philippe Laffont’s Coatue Management, Lee Ainslie’s Maverick Capital, and Stephen Mandel’s Lone Pine Capital, have all sustained double-digit losses this year. There is no news of any of the above funds shutting down, but their investors are clearly unimpressed with this year’s performance. Still, no other Tiger Cubs have reported closing their hedge funds either.
Many of these managers focus on high-growth and unprofitable names with large potential for free cash flow (FCF) in the future. However, with rising interest rates, these FCFs are discounted at higher rates, which subsequently lowers the present value of the discounted FCFs. At the end of the day, the majority of stocks will move in correlation with the S&P 500 and Nasdaq Composite, and high-growth names are no exception.
YTD Performance as of May 31st, 2022:
Tiger Global: -52%
Maverick Capital: -32.5%
Lone Pine: -30%
Coatue Management: -17%
A Silver Lining?
Despite all of this volatility in the hedge fund industry, there is still a silver lining. With the downfall of incumbent hedge funds comes a new generation of young investors that are ready to take on the challenges of the market.
If current market conditions persist, it is inevitable that more hedge funds will collapse. Emerging from the ashes will be a new class of eager, intelligent investors. But, don’t take my word for it. Here’s a list of acclaimed hedge funds that were established during the economic downturns of 2000-2001 and 2008-2009:
Tiger Global - Chase Coleman
Two Sigma - John Overdeck
Scion Capital (Now Scion Asset Management) - Michael Burry
Adage Capital Management - Phillip Gross & Robert George Atkinson
Altimeter Capital - Brad Gerstner
Kerrisdale Capital - Sahm Adrangi
Antipodean Advisors - Eric Chen
Khrom Capital - Eric Khrom
BeaconLight Capital - Ed Bosek
Jericho Capital - Josh Resnick
Hedge Vision - Institutional Insights
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