Hedge Funds’ Hail Mary: Bet on Tech

With returns lagging, firms pour cash into slumping Web companies | Given market reversals, technology “is fairly inexpensive”

Nick Summers


It’s been a brutal year for some big Internet stocks: Shares of Facebook are down 28 percent, Zynga has dropped 76 percent, and Groupon has plunged 82 percent as of Dec. 4. Yahoo! struggled, and even Apple saw a rough stretch eat a quarter of its market value in recent months (page 62). Along the way, some began to look like steals to hedge funds. “In technology, you can hit home runs,” says Donald Steinbrugge, a managing partner at consulting firm Agecroft Partners. “That’s always been the case. What has not always been the case is that technology, from a [price-earnings ratio] standpoint, is fairly inexpensive relative to what it’s been over the last 15 years.”

While hedge funds have long held big investments in tech giants such as Apple, Google, and Microsoft, these recent moves look more like bottom-feeding. Among the latest examples is a 9.9 percent stake in Groupon announced on Nov. 20 by Tiger Global Management, the $8 billion hedge fund run by Chase Coleman and Feroz Dewan. The firm declined to comment. Groupon, which has disappointed investors since it went public in November 2011, is up 43 percent since Nov. 13. Facebook, Zynga, and even Research In Motion, the struggling BlackBerry maker, have gained, too, making any fund that bought low this year look smart. (Nasdaq is up 14 percent so far this year.) Tiger Global’s aggressive move on Groupon came a month after Carl Icahn, the billionaire activist investor, disclosed a similar size position in Netflix, which had lost one-fifth of its value through Oct. 1. The company has risen 25 percent since Icahn’s purchase.

Facebook, RIM, Yahoo, and Zynga are among the high-profile tech underperformers whose percentages of publicly reported holdings by hedge funds have risen steadily this year, according to Securities and Exchange Commission filings and data compiled by Bloomberg. Seven hedge funds reported buying more than 1 million shares of Facebook in the third quarter. Luxor Capital Group bought more than 12 million Zynga shares, a stake now valued at about $28 million; Highside Capital Management reported a new stake about half that size on the same day. (Other funds, including Apex Capital Management, fled Zynga.) Renaissance Technologies upped its stake in RIM by nearly 10 million shares in the third quarter, a period when the company’s stock reached its 2012 nadir. Since Sept. 30 it has climbed 54 percent.

Goldman Sachs published research last month that also concluded that several billion-dollar funds have spotted value in listings that performed badly this year. According to Goldman, hedge funds owned 23 percent of Yahoo stock on Sept. 30, up from 18 percent on June 30. Long-lagging Yahoo’s share price has risen 21 percent since Marissa Mayer took over as chief executive officer this summer. While it already had significant hedge fund ownership — Daniel Loeb of Third Point used a 6 percent stake to push for management changes — funds including Tiger Global, York Capital Management, Cadian Capital Management, and Greenlight Capital reported buying millions of shares in the third quarter. “Technology is interesting to a lot of firms because the pace of change and innovation can be very rapid,” says Andre Mehta of investment advisory firm Cambridge Associates. “There are companies that can have very binary outcomes, that can be winners or losers, so there are short and long opportunities.”

Like tech stocks, hedge funds are under pressure. With a few exceptions, including Tiger Global — up 25 percent this year, according to a Nov. 9 letter to investors obtained by the New York Post — the industry has lagged 10 percentage points behind the Standard & Poor’s 500-stock index. Managers have only a few weeks to make up lost ground before yearend, when investors may ask what brilliant insights their fees have been paying for. Old-fashioned value investments, if that’s what these tech stocks prove to be, would help them make the case for a better 2013.

The bottom line Netflix has risen 25 percent since Carl Icahn acquired a stake, and other tech laggards have enjoyed surges after hedge funds bought in.


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