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Crossover Hedge Funds Lost Big in 2022. They’re Still Launching in 2023.


Managers say opportunities remain despite an uncertain economic outlook

Hedge funds investing in fast-growing public and private companies lost tens of billions of clients’ money last year. That isn’t stopping more “crossover" funds from launching.

Mala Gaonkar, 53 years old, a former co-investment chief of Lone Pine Capital LLC, launched her New York-based crossover fund, SurgoCap Partners, on Jan. 3 with $1.8 billion, people familiar with her firm said. Ms. Gaonkar’s launch was widely anticipated given her experience and marks the largest-ever startup from a female hedge-fund manager. Lone Pine, which Ms. Gaonkar left roughly a year ago, lost 36% in 2022 in its flagship hedge fund.

Patrick Fu, 45, who co-led Sequoia‘s hedge fund until October 2021 before leaving in March, is aiming to raise as much as $1 billion for his crossover fund, Los Angeles-based Dandelion Capital Management, people familiar with his effort said. Dandelion is targeting a third-quarter start. Sequoia Capital Global Equities lost about 41% last year in its worst-ever showing, according to people familiar with the crossover fund, including from its investment in bankrupt cryptocurrency exchange FTX.

Kristov Paulus, 33, a senior investor at Boston-based Whale Rock Capital Management LLC who left at year-end, plans to launch Kultura Capital Management in San Francisco in the second half of the year, people familiar with his plans said. Several chief executives of private companies Mr. Paulus backed while at Whale Rock have committed to investing. Whale Rock lost 43% in its crossover fund last year through November.

Loading up on shares of fast-growing public and private companies was one of the most surefire paths to profit for hedge funds in the later stages of the bull market, supercharging companies’ valuations, juicing funds’ returns and minting fortunes for managers, who said insights from their investments in private companies informed their public-markets wagers and vice versa. But funds’ recent losses as public and private valuations come under pressure are prompting a reassessment by managers and their clients.

Even against such a daunting backdrop, more launches are possible. Bankers say they are having ongoing conversations with employees at wounded crossover firms who are thinking about starting their own funds.

When funds are clawing their way back to their high-water mark, or the point at which they have recouped losses and can start charging full performance fees again, fat paydays for employees are less likely in the near-term. Some firms also are parting ways with employees as they shift course or reassess their teams.

The report card for crossover funds in 2022 is grim. Tiger Global Management lost 56% in its flagship hedge fund and 67% in its long-only fund, historic losses for the firm, while D1 Capital Partners lost about 30% in the share class in which half of clients’ money can be invested in private companies. Coatue Management and Viking Global Investors, among the best performers, lost about 19% and 23%, respectively, in their crossover funds.

In comparison, stock-picking hedge funds lost an average 2% last year on an equal-weighted basis, according to a Goldman Sachs Group Inc. client note. The S&P 500 lost about 18% last year, including dividends.

The firms have been relatively resilient despite suffering the kinds of percentage losses that caused hedge funds to close in 2008, showcasing the crossover strategy’s benefits for managers. “Historically you would have seen runs on the bank," said Jason Kaplan, a partner at law firm Schulte Roth & Zabel LLP. But with the additional stability private investments provide, “Many of these firms will survive the difficult 2022 and be in a position to make money on the upswing."

Appetite for new crossover funds is unclear.

Investors have been slow to redeem from their existing crossover managers and crystallize losses, meaning they have less to invest in new funds. They also say the bar is high for swapping out a fund working for no performance fees for one charging full-freight.

Ms. Gaonkar’s sizable launch, which Bloomberg News earlier reported, is likely to remain an outlier. A Lone Pine founding partner, Ms. Gaonkar led its technology, media and telecom bets for more than two decades and is one of the industry’s most experienced female investors. She put nine figures of her own money into SurgoCap, said people familiar with the firm, which can invest up to 25% of clients’ money in private companies. SurgoCap plans to use data science and invest in the disruptive impacts of technology on sectors including financials, industrials and healthcare.

Managers say opportunities remain despite an uncertain economic outlook.

Mr. Paulus has told potential clients continued innovation and companies’ ongoing migration to the cloud are opportunities. A self-taught developer, Mr. Paulus focused on software and private investments at Whale Rock and led profitable, early bets on Shopify Inc. and Tencent Holdings Ltd. Mr. Paulus has said he plans to donate part of his profits to charity.

Mr. Fu, who worked at Lone Pine before moving to co-helm Sequoia’s hedge fund in 2017 with its longtime managing partner, Jeff Wang, helped expand the Sequoia fund from $700 million to more than $12 billion. He has told potential clients he profitably invested in companies when they weren’t popular hedge-fund holdings and sourced private investments outside Sequoia’s famed venture ecosystem. One Sequoia Capital-backed company he invested in was FTX, he wrote in a recent fundraising letter viewed by The Wall Street Journal.

Dandelion will thematically invest in innovation, Mr. Fu wrote. Investors can opt into having up to 30% of their money in private companies. But “public markets currently hold more opportunity than their private counterparts" after their steep selloff, he wrote. “We expect to be highly selective in deploying capital to private investments."


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