One hedge fund is up 223% this year thanks to a big bet against tech stocks

His hedge fund, Coltrane Asset Management, had already been hit hard when markets plunged because of Covid-19. He decided to swing Coltrane’s portfolio from favoring cheap European companies to betting against tech and other fast-growing companies in the U.S. Markets with so many stocks trading at more than 10 times their revenues, with fervor concentrated in a few sectors, “always end poorly for investors," Coltrane told clients in a September 2020 presentation.

It almost ended poorly for Mr. Manku. By the end of 2020, Coltrane’s short had backfired as markets roared back, led by tech. Clients started to bail, and the fund lost 56% for the year. Despite gaining 19% in 2021, the hedge fund, which had once managed more than $1 billion, had dwindled to less than $200 million by January 2022.

Then tech stocks plunged.

Coltrane is now up 223% this year through June, according to people familiar with the matter, one of the biggest percentage gains this year by a hedge fund. The total gain is several hundred million dollars.

While growth-focused hedge funds were recording steep losses and companies were slashing their valuations, Coltrane reaped profits. Declines in the stock prices of pandemic darlings like Netflix Inc. and Peloton Interactive Inc. contributed, as did shorts on Meta Platforms Inc., videogame platform Roblox Corp. and electric-truck maker Rivian Automotive Inc., investors said. A bet against used-car website Carvana Co., whose stock price has plunged about 90% this year, contributed 9 percentage points of the gains, said a person familiar with the fund.

Mr. Manku and his team kept the trade on for two years, adding to bets as stock prices fell and cycling companies in and out of the trade. Coltrane placed bearish options bets that supercharged its returns, all while avoiding pressure to shut down.

“He’s a conviction manager," said Stuart Roden, an early Coltrane investor and ex-chairman of European hedge-fund firm Lansdowne Partners. “He didn’t get out at the wrong time. That’s extremely difficult."

Mr. Roden said he wasn’t as worried about the trade, whose analytical foundations he believed were sound, as he was about whether Mr. Manku would be able to see it through. “In our industry, lots of people who ended up right weren’t able to be there when they were right because they were closed out or clients took their money away."

Mr. Manku and partners Nick Banner and Laura Webster told clients the hyper growth some of these companies saw during Covid wouldn’t continue in the way their management teams and shareholders expected.

Lots of insider selling at fast-growing companies was a signal, too. “Those who know these companies’ prospects best are taking their capital out," the September 2020 investor presentation said, calling out insider sales at several companies.

Coltrane has locked in many of the gains from the shorts and is overall long the market again, though it still has some bets against growth stocks, said people familiar with the fund. Mr. Manku believes a greater opportunity now exists in snapping up cheap European companies, the fund’s historic area of focus.

Mr. Manku has told others Coltrane’s returns this year reflect a moment in time and that long-term performance is what matters. Since its 2012 start through June, the fund has gained 19% a year on average.

“Success is about having a consistent approach that’s true to your world view, staying grounded and calm," Mr. Manku said in a statement. “We are still very much at the beginning of our journey but have, we hope, learned a few valuable lessons already."

Mr. Manku, 38 years old, grew up in rural northwest England and developed an early fascination with stock markets and valuation. By high school, he was active on internet message boards dedicated to stock analysis and was investing for himself and friends in an account he’d opened in his mother’s name, with her blessing.

He warned of frothy, momentum-driven markets in a letter he wrote as a 16-year-old that was published in an investing magazine in 2000. “The key to safely defusing this situation will be difficult, for it would involve derating many obviously overvalued hi-tech companies, and sacrificing performance (and bonuses) in the aid of sustainable share price growth," he wrote.

Still, he suffered large losses when the dot-com bubble burst. Friends say that early lesson to adjust his portfolio to reflect his beliefs was formative for Mr. Manku.

After stints at Deutsche Bank in London and Daniel Loeb’s Third Point in New York, Mr. Manku—an improvisational saxophonist—started Coltrane in 2012 with less than $50 million and named it after the musician John Coltrane. Investors and friends describe him as private and focused on his track record rather than the size of his fund. He eschews idea dinners and chose to base his Europe-focused firm in New York, rather than London, to avoid crowd-think.

The trade was harrowing at times. In 2020, Mr. Manku started taking long runs along the West Side Highway during market hours to blow off steam. He once accidentally ran the equivalent of a marathon.

The team started to sense the tide was turning in April 2021, when special-purpose acquisition companies began to have trouble raising money. The conviction grew stronger in the fall as companies increasingly began to tout the metaverse, which struck Coltrane as being invented to suggest higher potential valuations for companies, and as the team saw more write-downs by buy-now, pay-later companies.

Mr. Manku has since told investors that if he were to execute the trade all over again, he might wait to put it on, lessening the pain Coltrane and its clients, including endowments and foundations, took in the interim.

“He’s pretty humble right now," one Coltrane investor said of Mr. Manku. “He knows that if he were a stock, he would be short it; he understands he’s due for the pendulum to shift. But he’s always focused on the game."