Tiger Global burnt by spec tech dumpster fire

Cathie Wood has caught a fair bit of flak for flamboyantly incinerating billions of dollars lately, but Charles Payson Coleman III’s bets are fizzling nearly as badly.

Bloomberg reported over the weekend that “Chase” Coleman’s flagship hedge fund at Tiger Global, the biggest and most successful of Julian Robertson’s protégés, lost a thumping 34 per cent in the first three months of 2022.

Given that Tiger lost 7 per cent in 2021, this means Coleman’s entire 48 per cent gain in 2020 — which personally netted Coleman an estimated $2.5bn — has evaporated, and then some.

In fact, by our calculation, with the Nasdaq up 17 per cent between the start of 2021* and the end of March this year, Tiger Global’s main fund has now underperformed the benchmark tech index by 56 per cent over the past 15 months. From Tiger’s Q1 letter to investors, via Bloomberg:

“In this moment, we are humbled, but steady in our conviction and confident about the go-forward opportunity . . . We are reassessing and refining our models using all the inputs available to us.”

Update: Initially we thought that the problems were mainly linked to Tiger’s massive buying spree for private company stakes. This was the biggest trend in hedge fund land over the past few years, and no one encapsulated it better than Tiger Global, whose open cheque book and hunger for quick deals over exhaustive due diligence has annoyed much of VC’s establishment royalty.

However, a person familiar the matter tells us that Tiger’s $35bn hedge fund has a 15 per cent cap on exposure to private companies, so the pain has primarily been caused by things like Chinese technology stocks and public hedge fund hotels like Peloton, even if the unlisted stuff hasn’t helped.

This big private investment wave embodied by Tiger is something worth keeping an eye on though. Normally we’re all for anyone who rattles Sand Hill Road but judging by the performance of venture capital funds in the first quarter, something has gone very seriously wrong of late. Behold, the quarterly performance of VC funds tracked by Refinitiv.

However, this is not just a Tiger Global issue (though it seems all the Tiger cubs have drunk heavily from the private market cup in recent years). Pretty much every self-respective hedge fund manager was struck with a severe case of VC-envy over the past two years and started at least dabbling with private markets.

Morgan Stanley analysts recently noted that hedge funds participate in a record-smashing 1,377 private market deals last year, more twice the then-record 2020 level, and three times 2019’s activity.

Last year hedge funds invested $180bn in private companies, accounting for 15 per cent of all private market deployment, according to Morgan Stanley, skewed towards early-stage VCC investing and growth equity.

Since 2021, however, private markets seem to have hit an air pocket. Following the Nasdaq’s slide since November, investors in unlisted equity seem to be waking up to the idea that maybe, just maybe, they slightly overpaid for some of the companies in their private market portfolios. From the FT over the weekend:

At the end of last year, 70 per cent of so-called growth investors — in between early stage venture capital funds and private equity investors that target mature companies — said they expected valuations to hold steady or rise, according to a survey of the top 25 investors in the field by Numis. Now, 95 per cent of investors anticipate offering lower valuations in the coming 12 months — an abrupt shift for the fastest-growing corner of the private capital industry.

The signs are everywhere. Instacart, an American player in the apparently newfangled world of instant grocery delivery, slashed its valuation by almost 40 per cent from $39bn to $24bn two weeks ago. Meanwhile Baillie Gifford’s Scottish Mortgage Investment Trust — aka the thinking person’s ARKK — marked down its private investments by an average of 9.1 per cent in January alone, according to analysis by Jefferies.

Many of these private market investments are made in separate investment funds where the money is locked up for longer. But a lot of “mainstream” hedge funds have struggled to resist the allure of high returns and smooth quarterly marks.

Morgan Stanley therefore highlighted four risks for hedge funds in its report, which feels like a timely note to end on. Watch this space.

1. Duration mismatch to the extent illiquid private investments are funded with capital that can be redeemed. The typical HF vehicle has much shorter duration and quarterly lock-up periods. Thus, the illiquidity of private holdings could prove challenging at times of investor redemptions and in market downturns.

2. Use of leverage to fund private investments. We understand some HFs may be using leverage at the fund level to purchase minority private stakes in companies, which could amplify risk given the lack of liquidity.

3. Mark-to-market and performance risk that could lead to more active selling. Private investment risk is more opaque as the assets are illiquid and not marked daily. A sharp correction could activate a NAV trigger permitting prime brokers to require additional collateral which could force selling of liquid HF positions. Client redemptions could compound the challenges in a market downdraft.

4. Tourism: Against a more volatile backdrop as public market differentiation increases, HFs could spend more time on their core business and reduce focus on privates, leading to subpar returns.