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Tiger Global’s Day of Judgment May Never Come: Shuli Ren

The hedge fund is smart to pivot to venture capital investing — after all, the market is changing so fast tech companies may soon be back in fashion

Good ones are hard to find.
By Shuli Ren
June 28, 2022 | 04:13 pm

Bloomberg Opinion — New York-based Tiger Global Management is taking a lot of heat for incurring one of the largest-ever losses by a hedge fund this year. Things could have been a lot worse for the tech-focused investor, which became the world’s busiest venture capitalist last year.

Paper losses at Tiger’s stock-picking arm are staggering. Its main hedge fund, which managed $20.5 billion at the end of 2021, was down 52% in the first five months. Its other large long-only stock fund fell 61.7%. Stumbles of this scale prompted the firm to cut its management fees, perhaps as a gesture of apology to its investors.

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As the June quarter nears its end, all eyes will be on Tiger Global to see how much money it has lost. Its performance in the unicorn-picking arm, in particular, is the wild card.

Billions, Lost | Tiger Global's stock-picking arm incurred one of the largest-ever losses for a hedge fund this year.dfd

Though it began as a hedge fund, Chase Coleman’s Tiger Global has supersized thanks to its venture capital business. As of October, Tiger Global managed about $95 billion — with its venture capital business accounting for around two-thirds of the total. The latest $12.7 billion fund, which closed in March, reportedly notched up double-digit net internal rate of returns since its inception last year.

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A selloff in tech stocks and a freeze in initial public offerings will inevitably lead to write-downs in the firm’s startup stakes. In the first quarter, Tiger Global marked down its VC investments by about 9% in aggregate. While that is nothing compared to the hefty losses in the hedge fund business, more cuts are expected in the next few days.

Much of Tiger Global’s venture empire is based on paper gains. According to PitchBook, for funds that started in 2018 and later, over 90% of the value they created for investors were unrealized gains. The vintage year for Tiger’s two biggest and newest funds was 2021.

House of Cards | Even for venture capital funds that began a decade ago, about 65% of the value funds create for their investors are based on unrealized paper gains.dfd

However, here is the beauty of investing in unlisted start-ups: There is no mark-to-market to speak of. So while a volatile Nasdaq bullwhips traditional hedge funds, prompting margin calls and sometimes forced selling, those who hide in the private space have more breathing room before the final reckoning comes.

If the 2000 dot-com crash provides any guide, Tiger Global might very well be able to get away with small write-downs for another quarter or two. The bear market back then also began early in the year, but it was not until the last quarter that VC funds had to mark down their portfolios, according to research provided by PitchBook.

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It’s worth revisiting when venture capital must write down unrealized gains. A few common triggers include when a startup’s latest funding rounds yields a lower valuation, if it goes bankrupt, or if there is a decline in the share prices of its peers in the public markets.

Out of self-interest, top-tier venture capital funds have recently been urging startups to tighten their belts. With layoffs and other cost-cutting measures, cash already raised can last longer. That means startups do not have to begin a new funding round and put their investors’ portfolio value at risk. In other words, the Nasdaq can be in a bear market, but the knock-on effect to real businesses may not arrive until months later.

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By the same token, a VC fund can always argue its start-ups are so niche that there are no peers in public markets. This is especially true if it invests in early-stage companies or cutting-edge technologies, such as nuclear fusion. Already, Tiger has pivoted its strategy — the latest fund will focus more on very young companies.

Meanwhile, with the stock market changing so fast, tech might be back in fashion in no time. In mere days, public market narratives have shifted from inflation to recession. There is now talk of the Federal Reserve’s preferred inflation measure cooling, and even a possible rate cut in 2023. This would be music to tech investors’ ears.

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Who knows? Scott Shleifer, who runs Tiger’s venture business and has amassed a fortune from it, may just get even wealthier. While traditional managers are nursing their wounds, the judgment day for crossover funds — industry jargon for hedge funds that also do venture capital — may never come.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Shuli Ren is a Bloomberg Opinion columnist covering Asian markets. A former investment banker, she was a markets reporter for Barron’s. She is a CFA charterholder.