Growth hedge funds suffer worst rout in years

January troubles add to 2021 losses for many funds.

The S&P 500 and technology-heavy Nasdaq Composite lost 5.3% and 9% in January in their worst month since March 2020. Picture: AFP

The sell-off in stockmarkets in January dealt double-digit losses to a range of hedge funds investing in technology and other fast-growing companies, sparking questions about whether a popular and lucrative strategy for these firms is running out of steam.

Whale Rock Capital Management’s hedge fund lost 15.9 per cent for the month in the share class that invests in public and private companies, following a 9 per cent loss last year, according to a person familiar with the firm.

Tiger Global Management’s hedge fund, which also lost money last year, lost 14.8 per cent for the month. Melvin Capital Management and Light Street Capital Management both lost 15 per cent following double-digit losses in 2021.

Other hedge funds that similarly have bet markets will continue to reward fast-growing companies, including London-based Pelham Capital and Atika Capital Management in New York, also lost in double digits in January.

Some funds investing in biotech, another strategy that has been a bright spot in the hedge fund industry the past several years, also had losses in January. Joseph Edelman’s biotech hedge fund Perceptive Advisors lost 18 per cent, said people familiar with the firm. RTW Investments, in New York, lost 17.7 per cent for the month in its flagship fund.

The carnage marks one of the worst starts to a year for fundamental stock pickers in recent memory. It adds to rare losses many growth and technology hedge funds suffered last year, as expectations of higher interest rates hit many of the stocks they favour.

The S&P 500 and tech-heavy Nasdaq lost 5.3 per cent and 9 per cent in January in their worst month since March 2020.

Funds got something of a reprieve as those indexes recorded gains starting Friday, with those double-digit declines partially ­reversing.

Funds’ recent losses mark the biggest test in years for growth ­investing.

Hedge funds that piled into shares in recent years have been richly rewarded against a backdrop of easy money and low interest rates.

Many of the stocks they gravitate toward benefit as investors venture further out on the risk spectrum in search of returns – and into assets such as tech companies that promise big earnings gains. Covid-19 supercharged these funds’ returns by increasing demand for many technology businesses.

But the strategy has begun to backfire as the Federal Reserve pulls back on pandemic stimulus. Higher rates take a bite out of investors’ perception of the value of potential future earnings, which tends to hit growth stocks like Rivian Automotive and DocuSign particularly hard.

The performance updates shared with clients generally offered little context for individual funds’ performance, but managers said that some of the same dynamics in place late last year had intensified.

Some growth funds fared better than others. Coatue Management and Viking Global Investors lost 4.2 per cent and 4.5 per cent respectively in their flagship funds in January.

Maplelane Capital, which suffered large losses during the meme-stock rally in January 2021, eked out a 0.40 per cent gain in the month after ending 2021 with a 35 per cent loss.

Some see opportunity amid the wreckage. Tiger in late December told clients they could put more money into its hedge and long-only funds “because the opportunity set seems asymmetric”.

Tiger, whose hedge fund had roughly $US25bn at the start of 2021, wrote, “The companies in our portfolio generally continue to perform well and grow at rapid rates. At the same time, many of their stock prices have declined considerably, resulting in lower valuations today than we have observed in recent history.”

The Wall Street Journal