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Top Hedge Funds Punished by Growth Stock Selloff

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Hedge funds that put investor money in what they must have thought were “never-ending” growth stocks are hurting. The Wall Street Journal’s Juliet Chung reports on the pain being felt by funds like Tiger Global Management and Melvin Capital Management, writing:

Tiger Global Management’s brutal year is getting even tougher, with losses at the firm’s high-profile hedge fund ballooning to 52% through May.

Tiger reported the drop, which extends a 44% loss recorded through April, in a note to its investors Thursday. The firm’s long-only fund lost 20.6% in May, bringing its losses for the year to 61.7%. The losses prompted Tiger to cut its management fee by 0.5% through December 2023 in both its hedge fund and long-only fund.

Tiger also said that starting in June, it would pay out investors exiting from those funds with both cash and shares in a new side pocket it would create containing stakes in private companies that would be paid out as those investments are realized. Tiger, which manages about $75 billion across its public and private-equity funds, said the value of its private investments had become a far larger proportion of its funds as its portfolio of public stocks continued to lose money.

“Our team remains maximally motivated to earn back recent losses,” the firm wrote in the letter, which was earlier reported on by Bloomberg News.

The selloff in growth stocks since November has punished Tiger and other previously top-performing hedge funds, including other so-called Tiger Cubs, whose founders trained under famed investor Julian Robertson. Many hedge funds investing in both public and private companies ramped up their reliance on private bets last year, at what turned out to be the top of the market. The losses have erased years of gains and put a question mark over what had been one of the industry’s top-performing strategies.

The selloff has contributed to the demise of one prominent hedge fund: Melvin Capital Management, which had already been battered by the meme-stock rally in 2021. Melvin founder Gabe Plotkin in May surprised clients by telling them he planned to shut down his stock-picking fund and give clients their money back. Melvin invested only in public companies.

Managers, investors and advisers to so-called crossover funds, which make both public and private investments, have said funds today are structured more soundly than they were in the run-up to the financial crisis, when illiquid investments often were commingled with liquid wagers in the same fund. Clients who were expecting to receive cash back in a timely manner after putting in redemption requests sometimes waited years.

But the selloff has exposed vulnerabilities that were glossed over when growth and technology stocks were gaining. Coatue Management LLC earlier this year told clients it would be side-pocketing private investments and paying out redeeming investors only partly with cash.

Action Line: If you need help building an investment plan that relies on dividends and the power of compound interest, let’s talk.

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E.J. Smith - Your Survival Guy

E.J. Smith is Founder of YourSurvivalGuy.com, Managing Director at Richard C. Young & Co., Ltd., a Managing Editor of Richardcyoung.com, and Editor-in-Chief of Youngresearch.com. His focus at all times is on preparing clients and readers for “Times Like These.” E.J. graduated from Babson College in Wellesley, Massachusetts, with a B.S. in finance and investments. In 1995, E.J. began his investment career at Fidelity Investments in Boston before joining Richard C. Young & Co., Ltd. in 1998. E.J. has trained at Sig Sauer Academy in Epping, NH. His first drum set was a 5-piece Slingerland with Zildjians. He grew-up worshiping Neil Peart (RIP) of the band Rush, and loves the song Tom Sawyer—the name of his family’s boat, a Grady-White Canyon 306. He grew up in Mattapoisett, MA, an idyllic small town on the water near Cape Cod. He spends time in Newport, RI and Bartlett, NH—both as far away from Wall Street as one could mentally get. The Newport office is on a quiet, tree lined street not far from the harbor and the log cabin in Bartlett, NH, the “Live Free or Die” state, sits on the edge of the White Mountain National Forest. He enjoys spending time in Key West and Paris. Please get in touch with E.J. at ejsmith@yoursurvivalguy.com