(Bloomberg) - For some of the world’s largest hedge funds, private equity ended up making -- or saving -- the year, and they’re betting that will be the case again in 2022.
Those with big holdings in non-public enterprises were rewarded in 2021 as a record number of companies debuted on U.S. exchanges, allowing the asset managers to realize gains.
Deep-pocketed investors have been flocking to private companies because stakes can be acquired relatively cheaply.
“Entering early allows us to acquire significant ownership in great companies at an entry price that is a small fraction of their ultimate public valuations,” Third Point’s Dan Loeb wrote in a first-quarter letter to clients.
His offshore fund climbed 25.7% through November and his top three money-makers were companies that Third Point invested in while they were still private and then went public within the past 13 months: Upstart Holdings Inc., SentinelOne Inc. and Rivian Automotive Inc.
Dan Sundheim’s D1 Capital returned 17% through November in a fund that can invest as much as 35% of its assets in private companies. It would have struggled without them.
That private investments made such a difference for so many managers might be surprising given how well public markets performed this year, with the S&P 500 climbing 28% through Wednesday. Yet surging stock prices were little help to managers who backed the wrong companies or were ensnared in violent short-squeezes.
Gabe Plotkin’s Melvin Capital Management was one fund that got caught flat-footed, stung by wrong-way short bets on companies including GameStop Corp., which skyrocketed during the late January meme-stock frenzy. His $11.5 billion firm rebounded 28.5% from its January lows, though it was still down about 42% for the year through November.
Chase Coleman’s Tiger Global Management and Philippe Laffont’s Coatue Management incurred losses on Chinese technology and consumer stocks that swooned amid a regulatory crackdown by Beijing.
‘Be Careful’
A reliance on private investments should give investors pause, said Chris Walvoord, global head of alternatives research at Aon Plc.
“Everybody needs to be careful shifting into this direction,” he said, noting that funds more heavily weighted with illiquid private investments are at greater risk if something goes wrong. “If a quarter of your investors ask for their money back, you’re going to have to shut things down, because it’s going to completely unbalance the portfolio.”
Some funds, meanwhile, did just fine sticking primarily or solely with public stocks.
That includes Senvest Management, run by Richard Mashaal and Brian Gonick, whose $3.3 billion fund returned 75% through November, helped by a big bet that GameStop would jump, as well as wagers on Canadian energy companies. The firm also profited by shorting Chinese education company Gaotu Techedu Inc., which tumbled when Bill Hwang’s Archegos Capital Management was forced to unwind its positions.
2022 Launches
Some of next year’s most anticipated hedge fund startups will invest in private companies, too.
Mala Gaonkar, who’s starting Surgo Capital, and Divya Nettimi (she has yet to name her firm) both told potential clients they’ll trade in public and private entities. Investors have said they expect both women to start with at least $1 billion of assets.
Multistrategy Funds
Multistrategy funds, those that deploy multiple teams to manage money across various investment strategies, were among the best performers in 2021, including Ken Griffin’s Citadel, which gained 24% through Dec. 27.
Such funds have been producing strong returns and are the fastest growing segment in the industry, said Kate Holleran, managing director of capital solutions at Barclays Plc. Investors have sought out multistrats, along with macro and market-neutral equity funds, because they provide portfolio diversification and aren’t correlated to the stock market, she said.
“We definitely expect this to persist next year,” Holleran added.
More than $28 billion flowed to multistrat managers this year through November, far more than any other strategy, according to eVestment data. Schonfeld Strategic Advisors reaped some of those gains. Its external assets have grown by almost 70% this year to $10.8 billion on performance and client inflows. The firm doesn’t disclose the assets it manages for billionaire founder Steven Schonfeld.
Treasuries Tumult
October was the most painful month for the industry’s mega macro funds after unexpected moves in Treasury markets pummeled portfolios. Firms including Alphadyne Asset Management, Element Capital Management and Rokos Capital Management are still digging their way out from losses.
Many such macro funds had so-called steepener bets on yield curves in the U.S. and Europe, wagering that interest rates would remain at or near historic lows. But the threat of higher inflation and unexpected moves from some central banks caused the yield curve to flatten instead. Portfolio managers got stopped out of their positions and hedge funds lost hundreds of millions of dollars.
Quants Rebound
“One of the bright spots this year are equity quant funds,” said Jon Caplis, chief executive officer of PivotalPath, whose index measuring the strategy gained 11.2% through November.
“Equity quants’ exposure to the S&P 500 Index was the highest since 2018, which can explain a little over half of their returns,” Caplis said, adding that quants adapted after being hurt badly in 2020. “This year the models are probably better equipped to handle the continued volatility we’ve seen.”
Note: Returns through November, unless indicated. *Through 12/17. **Through 12/23. ***Through 12/27
By Hema Parmar and Katherine Burton
