London hedge fund stumbles when guess on high-flying shares goes awry

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Stock-picking hedge funds around the world are suffering amid the market crisis.

And then there’s Marcho Partners, a tech-focused fund founded by a former deputy to tech investor Chamath Palihapitiya. The London-based fund, which had over $1 billion in assets under management at its peak, is down nearly 84% through June 30, according to a summary Marcho sent to investors, making it one of its worst performances ever Hedge fund represents 2022 so far.

Behind the dismal results: A leveraged bet on a relatively small number of high-flying growth stocks that have fallen in value, such as Shopify and British online used car retailer Cazoo.

The fund did not respond to requests for comment, and a representative who answered the phone said it was the company’s policy not to comment to the media.

Hedge funds generally aim to avoid the hefty losses of the broader market by hedging their stock selections, typically by betting against other stocks through short selling.

But as the market tide recedes, some tech-focused funds have suffered surprisingly large losses. Tiger Global Management, one of the largest, lost 50% in its flagship fund in the first half of the year thanks to bets on companies like Carvana and Shopify. The company has told investors that it is disappointed in its own performance and determined to recoup losses.

According to data research firm HFR, the average stock-picking hedge fund is down 12% in the first half of the year, while the S&P 500 is down over 20% including dividends.

Marcho Partners’ performance has significantly underperformed some popular tech equity funds such as Cathie Wood’s flagship Ark Innovation ETF and Bitcoin. Both fell more than 57% in the first half of the year.

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“Anything with the word ‘hedge’ in it just shouldn’t fall three to four times as much as stocks,” said Andrew Beer, founder of Dynamic Beta Investments, which manages funds that replicate hedge fund portfolios. “That’s an amazingly bad result.”

Marcho was founded in 2019 by Carl Anderson, who ran a hedge fund division of Palihapitiya’s company Social Capital. Anderson went into business for himself after Palihapitiya stopped accepting outside investment and wound up the hedge fund in 2018 amid a wave of exits.

A spokesman for Palihapitiya declined to comment.

Anderson set up a relatively small fund in London, backed by investors including a subsidiary of Belgian holding company Groupe Bruxelles Lambert, which raised 150 million euros, the equivalent of about $150 million. A spokeswoman for Groupe Bruxelles Lambert declined to comment.

Anderson bet on a range of technology stocks in 2019 and 2020, mostly software companies and online platforms, including Spotify Technology and video game software maker Unity Software. The approach was concentrated: He held positions in a relatively small number of stocks, and increased his stakes with leverage, about $1 for every dollar invested, as of June 2022, according to documents Marcho provided to investors.

After central banks flooded the markets with money during the Covid-19 pandemic and optimism grew about the reach of the technology, Anderson and his fund reaped a sizeable windfall. By the end of 2020, the fund was up 146% — a huge return for a hedge fund — and assets under management surpassed $1 billion.

As prices soared in 2021, the fund injected money into earmarked acquisition companies, including SPACs operated by Palihapitiya. It also increased the size of bets on software companies. Amid numerous bad months and a difficult second half for Spacs and Technology, the fund ended 2021 down more than 13%.

The water became choppy in 2022. After falling 36% in January, the fund lost money every month, including 20% ​​in June.

Shopify, one of its largest holdings, fell 77% in the first half of the year — a pain that got worse when the fund bought more shares earlier in the year and doubled its holdings. Another bet, Argentina-based e-commerce platform Mercado Libre, fell 52%.

By far the fund’s biggest loss came from Cazoo, which experienced a pandemic used-car boom and was listed at around $8 billion following its merger with Spac in 2021. While Cazoo previously forecast sales would rise for years to come, revenue has been less robust than forecast and losses significantly larger as the pandemic’s used-car frenzy has eased.

Marcho’s shares in Cazoo were valued at $15 million as of June 30, according to FactSet calculations, compared to $125 million at the beginning of the year.

Write to Eliot Brown at [email protected]

This article was published by The Wall Street Journal, part of Dow Jones

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