On Monday, August 24, when the Dow plummeted more than 1,000 points at the open, a prominent hedge fund manager who made his name in large part by identifying the next big technology and Internet winners, declared calmly, “People are not suddenly going to stop using Facebook and Google. Nothing has changed in the economics of their business.”
Whereas some managers of long-short and other strategies have been unloading stocks of technology and Internet companies, such as hardware and semiconductor makers, because they believed their growth was slowing, hedge funds generally have not abandoned the sector. Instead, managers seem to be sharpening their focus or revamping their strategies, mindful that many of the companies in these sectors are still among the fastest-growing in the markets. In fact, they are ceaselessly searching for the next broad group of companies that will lead not only the tech, Internet and media industries but also the overall economy.
We will focus on that search in this, the second part in a five-part series on hedge funds and technology. Part one ran last week.
Also from this series:
- Tech Stocks on the Edge of a Nervous Breakdown
- Hedge Funds and Tech Stocks: Dump the Old, Embrace the New
- Hedge Funds and Tech Stocks: The Allure of Private Investments
- Hedge Funds and Tech Stocks: Tiger Global’s Commitment to Tech
“We are entering a sweet spot for selecting individual winners and losers in the equity markets, especially in the TMT [tech-media-telecom] and consumer sectors,” pointed out Greenwich, Connecticut–based Glade Brook Capital Partners’ Paul Hudson, a so-called Tiger Grandcub (he once worked for someone who was a Tiger Cub, that is, employed in a hedge fund affiliated with Julian Robertson Jr.’s original Tiger Management). Hudson added in a recent client letter, “The pace of innovation and widespread adoption of new technologies have never been greater in our careers than it is today.”Hudson, who recently began to build a more concentrated public investment portfolio, says that technology and changing demographics, such as the aging of the baby boomers and the growing economic importance of what he calls the “digitally native Millennial generation,” are “structurally changing consumer and business behavior.”
Many of the new, winning companies reside in the Internet and software sectors. What’s more, many hedge fund firms are increasingly searching globally for the most promising investments, especially, say some managers, companies headquartered in China and India.
Earlier this summer Christopher Hansen’s San Francisco–based Valiant Capital Management told clients that the firm plans to launch a new long-only fund that will specialize in Indian securities. “We see this as a great opportunity to compound our capital,” Hansen, a Tiger Cub, said in the client letter.
Some managers have shifted their tech strategies to take advantage of fast-moving evolutionary changes.
For example, Stephen Mandel Jr.’s Greenwich-based Lone Pine Capital explained in a letter to clients late last year that the best investment opportunities will come from highly profitable new industry entrants that are disrupting large industries and rapidly gaining market share. Mandel is a Tiger Cub. “There is a greater degree of creative destruction occurring now across a number of businesses than at any time during our investment careers (and perhaps ever, or certainly since the Industrial Revolution),” Lone Pine wrote in its third quarter 2014 letter to clients.
This upheaval is being fueled mostly by the Internet and mobile communications. “This information and communications revolution is driving profound change across many industries, creating investment opportunity for us, long and short, as markets often underestimate the magnitude of change,” the letter added.
Other managers with roots to Tiger Management agree, at least conceptually.
For example, Tiger Global Management, the New York investment firm founded by Tiger Cub Charles (“Chase”) Coleman III, told clients in its second-quarter letter that it had partially recast its strategy within the broad tech, Internet and media industries, increasing its concentration on the firm’s favorite ideas, including Los Gatos, California’s on-demand media company Netflix; Beijing e-commerce company JD.com; Norwalk, Connecticut–based online travel company Priceline Group; auto information web site Autohome, based in China, and Naspers, based in South Africa; financial technology companies Norcross, Georgia’s FleetCor and Purchase, New York’s MasterCard; and Seattle’s Tableau Software, a maker of data visualization products.
At the same time, Tiger Global has exited most of its positions in the once-vaunted, now traditional media, cable and telecommunications industries.
“While there will undoubtedly be interesting opportunities in these areas in the coming months and years, we believe that as consumers continue shifting their time toward over-the-top content providers (i.e., Netflix) and other online video alternatives (i.e., YouTube), traditional media companies as well as the video and advertising revenue of cable providers will be under pressure,” Tiger Global explained in its client letter. “We refer to cable and telecom companies internally as Internet services providers, given our belief that most of their value and future growth will come from providing high-speed broadband access.”
What’s more, Tiger Global told clients that as categories of companies continue to converge, it will be less important how they are characterized. The firm believes that many years from now, the Internet will cease being referred to as a sector or as a category of companies. Rather, it will describe businesses that “have embraced changing technology to disrupt traditional industries.”
As Tiger Global noted in its client letter, Netflix is an example of an Internet company that’s also increasingly a global media company. The same applies to JD.com, which could either be an e-commerce company or “the largest fulfillment-based retailer in one of the two largest economies in the world.”
“The media space is undergoing a lot of turmoil,” says another long-short manager with Tiger Management ties. “Consumer behavior is shifting. People are watching less TV and watching more on their phones, tablets and computers.”
The key for these managers is to be able to regularly recognize these revolutionary shifts, which occur very frequently in the tech and Internet world.
Next week we will report on the TMT stocks hedge funds bought and sold in the greatest quantities in the second quarter.
