There’s nothing like blowing up twice in two years to humble a hedge fund manager. This seems to be the case with Dan Sundheim of D1 Capital Partners.
The once high-flying Tiger Grandcub lost 31 percent in January 2021 when it became a victim of the meme stock attack by rogue investors. After rebounding sharply over the rest of that year, D1 suffered another huge loss in the first half of 2022.
The Viking Global Investors alum then took drastic action, making a series of changes designed to reduce risk and aggressiveness and increase diversification. The pivot has paid off.
D1’s public portfolio is up more than 34 percent this year through September, after gaining 19 percent in 2023. Since the firm began to institute changes 28 months ago, the public portfolio has risen 85 percent. As a result, D1 is now within a few percentage points of its high-water mark. Sundheim and D1 Capital, which this week is holding semiannual investor meetings, declined to comment.
Sundheim launched D1 in July 2018 after working at Viking Global Investors from 2002 to 2017, the last two years as sole chief investment officer. Viking is the Tiger Cub co-founded by O. Andreas Halvorsen, who previously worked at the late Julian Robertson Jr.’s Tiger Management as an analyst.
In its first two full years, D1 was up 36.8 percent and 60.7 percent (in 2019 and 2020, respectively), according to an investor. It was also a major venture capital player. That part of the portfolio jumped 57.5 percent in 2020 and 70.6 percent in 2021, the investor says.
Although D1’s private portfolio enjoyed its last blockbuster year in 2021, the public portfolio began that year with devastating setbacks. In January 2021, it became one of the high-profile hedge fund victims of the meme attack, in which opportunistic investors used social media to galvanize others to go long on heavily shorted crappy companies, including GameStop, a major D1 Capital short position.
This resulted in a number of hedge funds’ suffering stunning losses, including Gabe Plotkin’s Melvin Capital, which eventually shuttered.
By the end of that January, D1 was down 31 percent. To prevent further severe damage, Sundheim covered all of his shorts and stopped shorting individual stocks, instead using basket indices to hedge. He staged a remarkable recovery: He make back all of his losses by October 2021, as the fund surged 40 percent over the ensuing nine-month period and the public portfolio wound up flat for the year, according to the investor.
But the following year, D1 again was bleeding red as the stock market plunged into a bear market. D1 lost 34 percent in 2022, with most or all of the losses incurred in the first five months of the year, per the investor.
Meanwhile, that same year, D1’s portfolio of private investments was marked down by double-digit rates as valuations in the private market in general were slashed amid the stock market meltdown, which adversely impacted the venture capital market. Shaken by those huge losses in 2021 and in 2022 and no doubt facing angry, frustrated investors, Sundheim in June 2022 instituted a number of major changes to his portfolio strategy and to the level of risk he was willing to tolerate.
D1, which emphasizes industrials and consumer stocks, made personnel changes to the investment team and broadened its coverage to include more industries and stocks, from nearly 600 names to more than 800 today. It also reinstated its focus on single-name shorts.
Perhaps more important, D1 sharply lowered its risk profile. From D1’s inception in July 2018 until May 2022, average gross exposure was 218 percent and net exposure was 67 percent. Since June 2022, these exposures have been slashed to 165 percent and 28 percent, respectively, according to the investor.
D1 also increased diversification in its short book. Today the average top-ten short positions account for 27 percent of capital, compared with an average of 40 percent at the time of the GameStop debacle, says the source. Not only has performance sharply rebounded, but the firm’s Sharpe ratio, a measure of an investment’s performance compared with a risk-free asset, is a strong 2.8.
Of the firm’s 85 percent gain since June 2022, 26 percent came from industrials, 15 percent from consumer stocks, 10 percent from software, 8 percent from internet, 6 percent from health care, 5 percent from business services, 5 percent from media, 4 percent from real estate, 3 percent from financials, 3 percent from hardware, and 1 percent from communications, the investor details, underscoring the diversified sources of gains.
This year’s increases have been driven by industrials and consumer stocks, which combined accounted for nearly two-thirds of gains. About 65 percent of D1’s capital is invested in North American stocks and 30 percent in Europe.
So far this year, Instacart parent Maplebear and tobacco giant Philip Morris have been among the fund’s biggest winners. At the end of June, the two stocks combined accounted for about one-quarter of D1 Capital’s U.S.-listed common stock long portfolio, according to regulatory filings.
Among industrials, two European stocks have also performed well: energy technology company Siemens Energy and aerospace and defense company Rolls-Royce Holdings, the investor says.
Though D1’s public portfolio is currently on a roll, the firm’s privates continue to suffer setbacks amid a wider erosion in the venture capital and IPO markets. D1 marked down the portfolio by 15.7 percent in 2022, 10.2 percent in 2023, and 2.6 percent so far this year. The top-ten private holdings now account for 60 percent of the portfolio, led by a stake in SpaceX valued at about $2.5 billion, representing about 25 percent.
D1 Capital also had a big win with Lineage, which went public earlier this year. Even so, since the firm’s inception, the privates have returned 122 percent and the public portfolio has posted a 109 percent gain, net of fees.
Now, of course, the big questions are whether Sundheim can sustain D1’s newfound success and whether he will stick to this less aggressive approach to investing.