How Many of You Think Your Fund is Going to Shut Down?

Disclaimer, I’m short focused and at a fund thats is doing fine. I dislike compounder-bro/Church-of-TAM mindset as much as anyone, but let’s isolate what is and isn’t peoples fault 

Let’s separate a few things. Stuff that’s absolutely on the PM and also might taint the analyst tangentially involved:

- Stuff that should have been obvious (ARKK ideas, giant CVNA)

- Clearly irresponsible risk (giant short in >100% SI equity stubs - tho GME was a tail event, that was still playing w fire)

- Manipulation/shadiness - I.e. triple pledging collateral to lever up into 25% of obvious fraud stocks

Now at the second level we have positioning bad calls:

- running aggressively net Long tech and shorting ‘bull mkt shorts’ ie low beta sleepy names which effectively is just more leverage and factor tilt. A lot of this, blown up on enough fraud shorts cause fed put, people just gave up and tried to lose as little money as possible on the short side

- firehosing money at every start up with a pulse (arguably it is what the gov demanded and LPs signed up for tho). I don’t really know much about privates stuff

Third though there are things that aren’t PMs fault. A hedge fund is a structure, that has an agreement. Now at a sort of typical SM fund you’re that will typically be something like ‘we run 30-60% net long, 120-200% gross, rough range of geographic or sector composition and some liquidity/sizing constraints’

Now the ‘brand name’ large funds everyone discusses here are a certain type of fund. Above ~$4bn the marginal impact to alpha generation drops off very quickly for concentrated L/S equity funds, due to limiting universe of names and/or concentration. Also, people knowing of the fund at all, unless you’re an activist, is detrimental alpha. A fund truly focused on best possible ROI will stay smaller and hope nobody ever has enough awareness of them to pull their 13F and front run them. (WSO screams silently: “but how will anyone know the preftige!!!”) The mandate a fund focused on max % performance would look for is something like: a few very large and carefully selected LPs who are locked up and the mandate is - whatever you want, asset class, sector, net, options, whatever. These sort of mandates are very hard earned, and rare, but in the right hands - that is the toolbox for those looking to produce the best returns. Now there is a preference function for any individual and some may prefer to just get as much AUM as possible and while being huge or less selective on LPs may reduce returns, it can make you richer. And based on the people on this site who say - whatever, they’re still rich, so they’re good - that does happen. Funds grow beyond their optimal capacity because they have proven and/or promoted themselves such that they are like a meme stock for LPs, ie if you have the ‘hot hand’ and a household name, there is capital if you want it. As we see with ARKK still getting inflows and Tiger saying they are too per articles apparently.

But the point is, whether you’ve optimally setup your structure and mandate to max fees or returns or deluded yourself that there’s no trade off, it is still restrictive. The rebuttal to the ‘it’s all the PMs fault’: well if you’ve pitched yourself as a long biased TMT fund - especially a ginormous concentrated one - you can’t just flip net short and rotate to energy. That’s not in your tool box, if LPs hire you to be the TMT portion of their public equities portion of their endowment, that’s what you are. So depending on what was pitched and agreed you should be compared to something like nasdaq adj for gross/net or other nuances. So if you have a long biased TMT fund and are down low double digits year to date, that is pretty good, especially if you rode it hard on the way up. If you picked LPs well, LP should be happy cause their energy or macro managers should be doing well. But because it’s the real world, maybe your LP piled into VC and hybrid tech managers and so they need to trim whatever is liquid anyway. You see being an SM is not all that different from being a pod. Your portfolio is still a product in someone else’s portfolio until it’s your family office. You may have looser limits and lower drawdowns but you are still supposed to do a certain range of things. And if you are mandated to run a sector specific strategy net Long, then the best you can do is buy the least techy tech stuff and take down net down as low as your LPs will allow. This is why the never ending stream of ‘omg but da funds don’t beat the S&P’ is silly. There are an infinite combinations of return profiles that funds pitch and LPs buy, and the vast majority of those aren’t ‘do wherever you want just beat the s&p or you fail’. 

So in closing. Compounder bros and church-of-tam and innovation-to-the-moon crowd did a lot of dumb stuff at the top at the cycle. To outperform such a crazy excess liquidity environment, it was basically a criteria that you had to ‘dream the dream’ and underwrite the super bull case OR acknowledge that this was a fed driven bubble and consciously note that during a fed driven bubble you buy stupid growing top line crap. Option 2 is exceedingly rare, capital accrues to option 1 in the upcycle and then we find out who is who once we see who actually pivoted out in time or at least played it a little safer in the later innings. There ARE funds that rode the tech wave and then flipped net short, shorted tech and long value and similar stuff. There are more funds that could have done that and didn’t. Then there are funds that just aren’t allowed to do that cause they’re supposed to be long biased TMT funds. Some of those funds still took nets down, or hedged rates or nasdaq in time. And most didn’t. But overall - basic % return = good or bad decisions by PM does not reflect an understanding of how hedge funds work. All that being said, it’s often a pretty good proxy anyway