Hedge Funds Keyed to Growth Stocks Stall Out

Those suffering notable pain include Andreas Halvorsen’s Viking Global Investors LP, whose $22 billion flagship hedge fund, Viking Global Equities, was down 4.5%, in its biggest-ever annual loss. Tiger Global Management lost 7.4% in its hedge fund—which managed about $25 billion at the start of 2021—in its first losing year since 2016.

Meanwhile, Boston-based Whale Rock Capital Management lost 19.2% in its hedge fund in the share class that invests only in public companies, and had additional declines this year part way through last week, according to people briefed on the matter. Palo Alto, Calif.-based Light Street Capital Management shed 26% last year.

“The selloff has been pretty brutal and pretty violent,” said Greg Dowling, investment chief of the Cincinnati-based investment-consulting firm Fund Evaluation Group. He said volatility in the stock market could present opportunities for funds, but predicted more pain ahead in the event of significantly higher interest rates, which “will derail companies where earnings are more of a hope and a dream than a reality.”

The poor performance contributed to an overall lackluster year for hedge funds betting on and against stocks, which gained an average of 11.9% in 2021, according to the industry-research firm HFR. That compares with the S&P 500’s total return of 28.7% and the Nasdaq Composite’s total return of 22.2%. A handful of companies had an outsize influence on the indexes’ performance last year.

The losses are a reversal from the previous several years, when such investors regularly notched some of the biggest gains among hedge funds. Covid-19 supercharged their returns in 2020 by juicing demand for many technology businesses.

Growth- and technology-oriented strategies account for one of the largest pots of money in the more than $4 trillion hedge-fund industry, given their success in recent years. Many of the stocks they gravitate toward benefit from low interest rates as investors venture further out on the risk spectrum in search of return—and into assets such as tech companies that promise big earnings gains.

In periods of tightening, those stocks become vulnerable as investors shift into such sectors as financials, which have traditionally benefited from higher rates.

Investors trace the recent selloff to the renomination in November of Jerome Powell as Federal Reserve chairman and expectations of a more hawkish central bank. The release last week of minutes from the Fed’s December meeting, in which officials discussed a faster timetable for raising rates this year than was widely expected, set the stage for the Nasdaq’s biggest one-week percentage decline since February.

A forecast Sunday from Goldman Sachs’s chief economist for four rate increases this year, up from a previously predicted three, also factored into concerns about the pace of tightening, investors said.

As of Jan. 7, 36% of stocks in the Nasdaq Composite were down 50% or more from their 52-week highs, according to Dow Jones Market Data. That included Peloton Interactive Inc., a popular hedge-fund holding.

A recent note from Morgan Stanley said that December was the second-worst month for stock hedge funds’ performance on their long bets since 2009 and that funds had cut their exposure to unprofitable or expensive tech companies in December. As of Jan. 7, Morgan Stanley said, stock-picking hedge funds’ exposure to growth versus value stood at a more than five-year low.

While the recent selloff has been difficult for growth hedge funds, firms that have stuck to buying inexpensive companies have benefited. The $3 billion New York hedge fund Lakewood Capital Management gained 32.1% last year, with stakes in banks and industrial companies providing a boost. Profitable shorts against some cannabis, electric-vehicle and cryptocurrency-related companies also helped, according to a person familiar with the firm.

Write to Juliet Chung at [email protected]