Light Street Capital’s long-short fund posted big gains in January, erasing losses from the fourth quarter, according to its letter to clients and two people with knowledge of the matter.
The firm’s Halogen fund gained 7.6 percent last month, recovering from a 5 percent loss in the final three months of 2019, according to Light Street’s fourth-quarter letter to clients, dated January 31. The long-short fund’s strong performance was led last month by many of the names that hurt it during the fourth quarter.
“In early 2020, we are seeing a reversal in the growth-to-value rotation that dominated fund flows in the second half of 2019,” Light Street said in the letter, which was obtained by Institutional Investor. “Many of the largest detractors in the fourth quarter last year are among the best performing stocks YTD in 2020.”
Light Street declined to comment.
According to the letter, Halogen posted a 1.8 percent loss last year while the Light Street Long Only Fund was up 22.6 percent in 2019. Light Street’s Halogen fund was up more than 15 percent through the first eight months of 2019, and then went into a sort of free-fall over the final four months, according to the letter.
The firm, led by Tiger Cub Glen Kacher, invests in tech, internet and media companies that are benefiting from disruptive technologies while shorting the victims of the same trends. In the letter, Light Street assured clients it is comfortable with its swings in performance.
“While the market did not reward our views in 2019, we do not invest for the short term,” Light Street said. “Given the concentration of the portfolio, our returns are generally uncorrelated and may be out of sync at times with global indices.”
Halogen was heavily hurt last year by its short book, which detracted 17.6 percent from the gross return. “Light Street has a track record of generating alpha and profits shorting stocks, but 2019 was a difficult year for managers running meaningful short books given the market’s run,” the hedge fund firm said in the letter.
Light Street described two of the three largest short detractors as companies that benefited last year from “cult-like followings.” These two shorts remain in the portfolio, Light Street said.
The hedge fund firm also told clients it did not make significant changes to the portfolio during last year’s sharp decline. Rather, it “aggressively added” to positions, including Lyft, Uber Technologies and Netflix, which Light Street asserted “are dislocated from fundamental value.”
The firm, a long-time investor in the sector, said that “Uber and Lyft continue to raise prices on ride-hailing and introduce new cost saving measures like batching credit card payments to reduce payment processing charges.” Light Street also told clients it took advantage of the sell-off in growth tech to initiate new positions, including cybersecurity company CrowdStrike Holdings, video game maker Activision Blizzard and Japanese conglomerate Sony Corp.
Sure enough, in January, all but Activision rose in price, led by Uber and CrowdStrike. Uber’s shares surged 22 percent last month, while CrowdStrike’s stock price jumped about 22.5 percent. Lyft’s shares rose about 10 percent in January, while Netflix increased 6.7 percent and Sony was up 3.2 percent. Activision was down less than 2 percent last month.
Looking out to the rest of the year, e-commerce remains the fund’s largest exposure. Its key positions include Amazon.com, MercadoLibre, a major player in Latin America, and Sea’s Shopee, a major player in southeast Asia.
“These businesses control billions of dollars of transaction flows and are investing aggressively in payment processing to capture an even larger percentage of the transaction,” Light Street said in the letter.
Cloud is also a big part of the portfolio, including Microsoft Corp., Salesforce.com and ServiceNow. Within the high-growth segment of the cloud portfolio, Light Street is focused on four key areas: security, e-commerce infrastructure, enterprise collaboration and public cloud, according to the letter.
“As growth investors, we are accustomed to periodic sell-offs in the market,” Light Street said. “It is the nature of growth investing, and often the opportunity. Historically when risk appetite in the market has pulled back for non-fundamental reasons, it’s been a great opportunity to add risk.”