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- The Biggest Loss in The History of Hedge Funds...
The Biggest Loss in The History of Hedge Funds...
The business cycle is just that… a cycle.
Our economy is a fluid thing. There are good times and bad times.
The U.S. economy is mostly made up of consumer spending. So businesses tend to do well when the consumer spends. And struggle when the consumer pulls back.
Now, the business cycle has become mostly a credit cycle due to the Federal Reserve holding interest rates at or near 0% for most of this century. Meaning businesses and consumers get to borrow money cheaply and spend on whatever. Fueling economic growth.
So when the business cycle turns down — and borrowing gets more expensive — you see which companies simply benefitted from the “good times.”
Just like ocean tides.
When the tide goes out… you see who’s been swimming naked.
The 0% interest, free money world is no more.
This is what’s caused a massive repricing in every asset class over the past 10 months.
Now companies, hedge funds, private equity funds, and the like are forced to make real business and investment decisions. Ones where the cost of capital is higher than zero.
There are — and have been — many exposed as the tide goes out.
But none more obvious than private equity investment firm Tiger Global.
Tiger Global will be known as the poster child of the free-money era.
Tiger made over $10 billion during 2020 as every tech stock rocketed higher.
It was one of the best performances in a single year by a hedge fund. Tiger was lauded as a paradigm changer of investing in both public and private companies.
Here’s New York Magazine:
“At the end of last year, Tiger Global had become one of the biggest firms of its kind — it operates a hedge fund, a long-only fund, and several venture-capital funds — in the world. Including the debt it employed, it was managing about $125 billion with an investment staff of 52 people, according to a filing with the Securities and Exchange Commission. (Excluding debt, it had $95 billion.) A year earlier, Tiger Global’s hedge fund had topped a widely followed industry performance list — making some $10.4 billion for investors during the pandemic year of 2020, when its tech bets skyrocketed. By almost any metric, it was one of the most successful players in an extremely crowded and competitive global industry. At the time, Coleman was only 45, the youngest hedge-fund manager to ever make the list. His net worth would soon hit an estimated $10 billion.”
Tiger doubled down on its bets in 2021. Why not?
Interest rates were still at zero. Making the cost to borrow and invest free.
Here’s New York Magazine again (emphasis added):
“In 2021, it backed a dizzying 335 deals, more than one investment per business day.
‘Tiger could be a little bit more aggressive. They could move quicker. They paid higher prices than a lot of their venture peers,’ says hedge-fund consultant Greg Dowling of Fund Evaluation Group. ‘And that worked really well until everybody else started following the same strategy. They got bigger, which means you had to put more money out.’”
Tiger was the behemoth in the private market.
They had more money than everyone. They were willing to write bigger checks faster than anyone. And they did.
There were accounts of Tiger writing private equity checks within as little as 12 hours after hearing a company pitch.
In its 2020 anniversary letter, the firm said it was “searching for ways to make our investment flywheel spin faster.”
Tiger’s Founder Chase Coleman was lauded as a revolutionary. One who took private equity investing to a new level.
Coleman even replicated the velocity of his firm’s private equity investing to real estate (emphasis added).
“Last year, Coleman spent $122.7 million for Donald Trump’s former Palm Beach estate after looking at the house for 15 minutes, according to the New York Post. It was the highest price ever paid for a home in Florida. In true Tiger Global tradition, the transaction was completed in record time.”
Tiger was replicating a page out of SoftBank’s playbook… writing even bigger checks to their earlier investments and marking up the valuations on those companies.
“One of those unspoken ‘rules’ Tiger Global broke was allowing separate Tiger Global venture-capital funds to invest in the same company. This practice had often been prohibited in VC-land in the past because the newer funds can end up making the older funds look better simply by buying a piece of the companies in the earlier funds’ portfolio. ‘In most cases, you’re not allowed to do this,’ says Michael Ewens, a finance professor at the California Institute of Technology who studies entrepreneurship, referring to provisions in contracts between VC fund managers and their investors.”
Other private equity firms couldn’t compete. They were getting outbid on every deal.
Venture firms had to replicate Tigers playbook. Writing bigger checks. Investing at the same speed. And waiving due diligence.
All signs of a private equity bubble.
But then inflation started to get out of hand… forcing the Federal Reserve to start raising interest rates.
Everyone knows what happened next.
Investors sold pretty much everything. Especially growth stocks — which are down 50-90% from their all-time highs.
How’d Tiger hold up?
They were down 50-65% across all their funds.
Here’s the Financial Times (emphasis added):
“[Tiger] ended the second quarter down 63.6 per cent after fees, according to a letter sent to investors seen by the Financial Times, while the firm’s flagship fund ended the first half of the year down 50 per cent after fees.”
Tiger has lost more than $25 billion total across its funds… and counting.
More than Masayoshi Son’s SoftBank. Who just lost $23 billion of investors capital in the second quarter.
Five times more than Long Term Capital Management’s blowup in 1998 which almost crashed the stock market.
Four times more than Melvin Capital during the GameStop short squeeze.
So how did Tiger declare their mea culpa?
By blaming inflation.
Here’s the Financial Times headline:
Tiger took in billions from endowments, pension funds, sovereign wealth funds, high net worth individuals, and the like. All chasing the hot money.
Now it’s gone.
The tide is going out. And we’re seeing it’s not just Tiger who’s been swimming naked (emphasis added).
(“Hedge fund hotel” is industry slang for an investment that’s very popular among hedgies.) “Most of the large portfolio managers all know each other. They share the same notes. They copy each other and they copy what’s been working.” Indeed, a number of other Tiger cubs show up in these crowded trades — names including Coatue Management, Lone Pine Capital, Maverick Capital, Viking Global Investors, and D1 Capital Partners. (These hedge-fund firms have also followed Tiger Global into investing in venture capital. All are facing significant losses this year.)
As the Tiger 40 stocks have tanked, the hedge funds that own them have gotten margin calls asking for more cash or collateral for their loans and redemption notices from investors wanting their money back. That in turn created more selling, which created even more selling, and so on. The same feedback loops that were operative on the way up are working in reverse on the way down.
Bloomberg recently highlighted 13 of the worst-performing stocks held in common among these funds. The more familiar names are former high-fliers Carvana, Netflix, Shopify, and electric-vehicle start-up Rivian. All have fallen more than 70 percent, and Tiger Global was in all of them.
Tiger is now telling investors they’re limiting the number of investments in 2022.
You’d think public and private equity valuations down 50-90% would be the perfect time to double down… we do too.
Except Tiger realized they were the price makers. Not the price takers.
They inflated the market. And now they’re deflating the market.
This is bad news for all those who deployed significant amounts of capital in 2021 during the mania phase.
But it’s good news for investors, like Mighty clients, who have large cash balances to deploy capital after the knife stops falling.
It allows us to buy great companies at great prices.
The knife is still falling… despite the fact stocks have rallied over the past few weeks. But we’ve been chipping away and deploying capital very slowly. We’re confident our companies will be worth a lot more in the next in the next 3, 5, 10 years.
Good investing,
Lance
P.S. Reply back to us if you’re interested in becoming a client. And how we’ve been using our Three Pillar Portfolio Strategy to weather this market.