Return of Beta Tech HFs?
I am being somewhat facetious but also seriously asking if the AI trade will give tiger cubs/SMs some ground again instead of just bleeding AUM/talent to pods? Or do you guys think the ship has sailed and nobody wants to trust them with capital anymore?
The return of beta tech hedge funds, particularly Tiger Cubs and similar single managers (SMs), hinges on several factors. Based on the most helpful WSO content, here's the breakdown:
AI Trade and Tech Resurgence: The AI trade could indeed provide a lifeline for tech-focused funds. If these funds can capitalize on the AI-driven market opportunities effectively, they might regain some ground. However, execution is key, and many funds have struggled with discipline and strategy in the past.
Challenges with Trust and Capital: Tiger Cubs have faced significant outflows and underperformance recently, with average returns in the past four quarters being around negative 30-40%. This has eroded trust among allocators, making it difficult for them to attract new capital. The narrative around their ability to deliver consistent alpha has shifted, and many investors are now favoring multi-manager hedge funds (pods) due to their relative outperformance and diversified strategies.
Structural Issues: The broader trend of capital flowing to ETFs, index funds, and market-neutral strategies poses a challenge for traditional long-short equity funds. Many of these funds are being forced to adapt, often incorporating quantitative strategies or risk stagnation.
Future Outlook: While the AI trade might offer a temporary boost, the long-term viability of these funds depends on their ability to innovate, rebuild trust, and demonstrate consistent performance. Without these, the shift of talent and AUM to pods is likely to continue.
In summary, while the AI trade could provide a short-term opportunity, the structural and trust-related challenges facing Tiger Cubs and similar funds suggest that the ship may have largely sailed unless they can significantly adapt and evolve.
Sources: Are Hedge Fund Employees Structurally Fed, Are Hedge Fund Employees Structurally Fed, Is there a future for non-quant hedge funds?, Will L/S Hedge Funds Be Around In 10 Years?
tiger cubs didn't do specifically well this year. too much exposure into software, and the top performing names are all semis/AI Infra. Some AI-focused L/S funds prob have crazy returns tho (intc, amd, lite, nbis...)
Some (and pretty big ones at that) do have absolutely mind-boggling returns riding the semi gravy train. Though not as much into the names you just mentioned.
It's really the VCs that got in early or deployed lots of growth stage dollars will have unprecedented groundbreaking vintages... talking about 50-100x MOIC on funds in 5 years.
imagine investing in OAI/Anthropic in Series A/B lol
enough gains there to feed generations
This assumes they actually get liquidity and not just mark ups lol
theyll get liquidity - IPO is p much guarenteed
might not be at the current / projected lofty valuations but itll tens if not hundreds of times what they invested
If only it were that simple.
These business are not in a state where they CAN go public in the near term realistically yet simultaneously HAVE to because the amount of funding available in the private markets is drying up. The moment the hood gets peeled back and people see the economics, investors will balk. It's amazing technology but a horrible, horrible business unless something fundamentally changes soon.
Return math doesn't make sense. OAI is closer to ~10x return from ~$30B to ~$850B today [given equity substantial dilution] which is closer when insitutional capital started to get involved and big MSFT bucks.
yes the economics don’t look great BUT that’s mainly due to RnD costs
actual cost of operation isn’t crazy and i believe they actually turn an operating profit?
but they must burn through cash for newer and better models constantly (which is super expensive) or they’ll get taken over by the other one or gemini or grok or whatever
My friend, the entire business model is reliant on R&D costs. Saying that "it's profitable is you strip out R&D" makes as much sense as saying "a consumer business is profitable is you strip out COGS." They never STOP investing in R&D. R&D is effectively the COGS of what they're selling. And unlike how traditional gross margin can compress with scale, AI foundation model margins (so far at least) WORSEN as they introduce larger models and gain more customers - they do the OPPOSITE of what normal businesses do to margins when they scale.
I believe the underlying technology is incredible and has huge implications for the future. But goddamn does it make a shitty business from what we've seen so far. How crazy is it for a business from go from 1 to 30 billion ARR inside 3 years and still be losing money hand over fist? People who try to use the argument "oh AWS/Uber lost money for XYZ years" are delusional. Those are completely different models that had clear paths to profitability but CHOSE not to make the switch in favor of growth. And they both burned through a fraction of the capital these companies have already. The foundation models have shown they can grow but have NO clear path to profitability barring energy and R&D costs approaching 0, which is never going to happen. They've got scientists getting paid 10s of millions who can do some cool stuff, but have 0 experience building profitable businesses and themselves bring in 0 actual revenue making them a pure cost center with no predictable ROI.
The level of differentiation between products is negligible, and the improvements made with each subsequent version release are decreasing in magnitude. The only reason they've kept going as long as they have is because VCs and other private capital providers bought the story and vision and built a cartoon sized pipeline from their wallets directly into energy providers and Nvidia's pockets. It isn't sustainable unless there's a major breakthrough that lowers costs or they dramatically raise prices, the latter of which will slaughter users.
I've said it before - I think X and Gemini will be the winners because Elon's an anomaly and Google is the best cash machine ever and can sustain the cost burden. I'd seriously starting to believe both OpenAI and Anthropic fold and get firesaled to either MSFT or Amazon, then go through a massive restructuring unless something massively changes in the next 18mos.
LPs smarter, comparing them to benchmarks (QQQ, SMH, etc.) on upside and downside. Good ones will attract flow (especially as pods give back) but not off the beta.
Cannot tell you how sick I am of Brad Gerstner at Altimeter constantly shilling his OpenAI position. He's a total clown riding beta, classic boom-bust moron
My view is actually that we'll see a lot of fund flows (already are) going to APAC for the hardware/infra build there. A ton of names there that are key to the whole semis value chain (think weird shit like PCB solder mask ink) that can be played on JP, TT, KS.
Tiger cub performance should continue to be idio as the winners kill it and losers get smoked with the sheer vol. we see these days.
Situational awareness is over $10bn SM now run by 24 year old so yes
Architecto soluta odio eum voluptate incidunt qui ut. Impedit eum sit totam placeat totam sed. Modi et vel blanditiis in. Voluptatem porro et est ipsam possimus.
Perspiciatis quia et optio sit odio vel ullam. Vitae laborum ipsa id quia et possimus. Commodi unde vel doloribus minima non quia numquam. Dolores omnis itaque totam aut et dolorem voluptatum.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...