Growth hedge funds suffer worst rout in years

Stock markets’ selloff 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% for the month in the share class that invests in public and private companies, following a 9% 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% for the month, another person said. Melvin Capital Management and Light Street Capital Management both lost 15% following double-digit losses in 2021, clients said.

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, investors said.

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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%, said people familiar with the firm. RTW Investments, in New York, lost 17.7% for the month in its flagship fund, a person familiar with that firm said.

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 favor.

The S&P 500 and technology-heavy Nasdaq Composite lost 5.3% and 9% in January in their worst month since March 2020. Funds got something ofa 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 of fast-growing public and private companies in recent years have been richly rewarded against a backdrop of easy money and low interest rates.

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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 juicing demand for many technology businesses.

But the strategy has begun to backfire as the Federal Reserve pulls back on pandemic-era 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 Inc. and DocuSign Inc. 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 have intensified.

Some growth funds fared better than others. Coatue Management and Viking Global Investors lost 4.2% and 4.5% respectively in their flagship funds in January, according to people familiar with the firms.

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

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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 $25 billion 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."