The very public downfall of Melvin Capital was mostly pinned on big losses from their short positions in Gamestop (GME), which a horde of Reddit traders bet on to squeeze the aggressively short selling fund out of existence. While it kind of worked, big and very public losses at other hedge funds aren’t happening for quite the same reason.
For instance, legendary Tiger Global Management, which started 2022 with nearly $100 billion in AUM, has lost a whopping 50% in the recent downturn—almost all of it because of very aggressive bets on high-tech, some private equity investments being written down and some high flying public stocks that have seen huge losses as tech is sold off. More recently, reports of an over 40% loss at over $100 billion dollar hedge fund Lone Pine have shocked the asset management community, with rumors of the fund looking to raise more funds spreading like wildfire.
Keep in mind that the S&P 500 is no longer in a bear market, but is still down double digits in a challenging year for pretty much all assets. However, hedge funds are supposed to thrive in such markets. Shorts on bad stocks combined with longs on good stocks means that, in markets where returns are low or negative, hedge funds should outperform, either with smaller than market losses due to the shorts or positive returns thanks to those shorts. A hedge fund would have to be grossly incompetent and unlucky to have their shorts go up in value and longs fall in value at the same time—so is that what’s happening to the world’s largest and most successful hedge funds?
Not exactly. While famously secretive about their holdings, what can be discerned from publicly available information is that these funds haven’t really been all that hedged. Big bets on technology, with aggressive bets on some of the most high risk low-earnings (or loss-producing) firms have meant meteoric gains in the 2010s for these funds—and also sudden losses as these unhedged bets turn in 2022 with the worst year for technology since the early 2000s. Simply put, these hedge funds weren’t really all that hedged—and big bets on high-flying tech worked until they didn’t.
Does this mean the end of an era? Is the hyper aggressive bets on tech in a hedge fund without worrying about shorts or hedges no longer a viable strategy? If so, what will replace it? Or, is now the time to double down on that strategy now that they’re temporarily down in value? These are the questions hedge funds will be grappling with in the coming years—and note how very different they are from the kinds of questions hedge funds have asked themselves in the past. Above all, a hedge fund needs to adapt to change to survive—because you can’t hedge against everything all at once.
