Global stock-picking hedge funds have taken heavy losses in the recent market downturn.
In addition, tech investor Chamath Palihapitiya’s former deputy established the technology investment firm Marcho Partners. Based on a summary Marcho provided to its investors on June 30, the London-based firm, which had over $1 billion in assets under management at its height, had one of the worst-known returns for a hedge fund in 2022.
A leveraged bet on a limited number of high-flying growth businesses, such as Shopify Inc. and British online used-car reseller Cazoo Group Ltd., is to blame for the terrible performance.
Hedge funds’ stock choices are frequently hedged by betting against other stocks via shorting to protect the portfolio from large losses that might otherwise be incurred in the general market.
But as the market has begun to turn, the losses at some technology-focused funds have been startlingly high. For example, tiger Global Management, one of the largest, had a 50% drop in its flagship fund during the 1st half of the 2022 due to investments in Carvana Co. and Shopify, among others. Nevertheless, the company informed its shareholders that it was disheartened by its performance and was committed to recouping its losses.
According to data-research firm HFR, the typical stock-picking hedge fund lost 12% in the year’s first half, while the S&P 500 was down nearly 20% (including dividends) over the same period.
Marcho Partners underperformed both bitcoin and a number of well-known technology stock funds, including Cathie Wood’s flagship Ark Innovation ETF. The 1st half of 2022 saw a decline in each of them of more than 57%.
Andrew Beer, the founder of Dynamic Beta Investments, which runs funds that imitate hedge-fund portfolios, said, “Anything with the term ‘hedge’ in it just isn’t meant to fall down three to four times as much as stocks.” It’s a shockingly awful outcome, to put it mildly.
Carl Anderson, who oversaw Mr. Palihapitiya’s hedge fund section at Social Capital, founded Marcho in 2019. After Mr. Palihapitiya stopped accepting outside investment and shut down the hedge fund in 2018 amidst a wave of departures, Mr. Anderson decided to go out on his own.
Mr. Palihapitiya’s spokesperson refused to comment.
A Belgian holding firm, Groupe Bruxelles Lambert SA unit, invested 150 million euros, or around $150 million, to help Mr. Anderson establish a modest fund in London. A representative from Groupe Bruxelles Lambert said she could not comment.
Mr. Anderson placed wagers on many equities in the technology sector in 2019 and 2020, focusing on software and internet platforms, including Spotify Technology SA and video game engine developer Unity Software. But, again, the method was one of focused attention: Using the leverage of around $1 for every $1 invested as of June 2022, Marcho maintained stakes in a limited number of equities and increased the size of his wagers.
Mr. Anderson and his fund made a tidy profit as a result of central banks flooding the markets with money during the Covid-19 outbreak and rising excitement about the potential of technology. The firm’s returns by the end of 2020 were 146 percent, which is very high for a hedge fund, and the amount of money it managed topped $1 billion.
This fund invested heavily in special-purpose acquisition companies (SPACs), notably those managed by Mr. Palihapitiya, when prices skyrocketed in 2021. The stakes placed on software enterprises were also ratcheted up as a result. However, the fund finished 2021 with a loss of over 13% due to a string of poor months and a turbulent second half of the year for small and medium-sized enterprises (SPACs) and technology.
In 2022, the seas were much rougher than in previous years. Every month since January, when it dropped by 36%, the fund has lost money, most recently losing 20% in June.
One of its major investments, Shopify, had its share price drop by 77% in the year’s first half. This loss was caused by the fact that the fund had doubled its holdings in Shopify stock at the beginning of the year. Mercado Libre, an e-commerce site established in Argentina, was another gamble that plummeted by 52%.
Cazoo was the fund’s greatest loser because it capitalized on a widespread upswing in the used-car market to list by combining with a SPAC in 2021 at a value of around $8 billion. Cazoo had predicted that sales would skyrocket for years, but as the used-car craze of the epidemic has subsided, income has been less than expected, and losses have been much more significant.
According to FactSet’s valuations, Marcho’s stake in Cazoo was worth $15 million as of June 30, down from $125 million at the beginning of the year.