Yet another massive crossover hedge fund is facing serious losses. New York-based D1 Capital Partners has lost approximately $7 billion this year.
From a Bloomberg report that broke yesterday:
…D1 has told investors who selected a 50-50 mix of public and private assets that the strategy lost 23% through May. The firm attributed most of the damage to public investments, which fell 44%. It marked down private assets only 8% — including 0.05% last month.
This 50-50 mix was the most common choice for D1 investors.
D1 still has about $17 billion in private equities and $7 billion in public stocks, implying losses of about $5.5 billion and $1.5 billion respectively. The firm’s total loss for 2022 alone appears to be about $7 billion.
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D1’s losses, large as they are, are probably severely understated.
It has marked down its private company stocks by only 8%. However, the Refinitiv Venture Capital Index is down 47% for the year.
If D1’s portfolio mirrors the broader markets, the real losses on this $17 billion pile of private company stocks could be billions more.
To make things even more interesting, D1 borrowed billions and poured it into illiquid private company shares. From Bloomberg:
Hedge funds were tallying gains on their hottest bet in years when Dan Sundheim reached an unusual deal with JPMorgan Chase & Co. to go even further.
With the bank’s help in August 2020, Sundheim’s D1 Capital Partners used its stakes in private companies as collateral for borrowing $2 billion that the firm could put toward yet more of those stakes, among other things. Last year that focus on private companies looked brilliant, as D1 updated its valuations and posted a whopping 70% gain in that part of its portfolio.
Now, the industry is bracing for a reckoning.
I invest in startups myself, but I would never borrow money to do so.
Borrowing money to invest in tech startups is completely reckless. These companies are volatile, speculative, and illiquid.
It’s telling that the best venture capital firms in the business, like Sequoia and Benchmark, don’t play these shell games to boost returns.
Losses for crossover hedge funds like D1 are so severe that some cannot even meet redemption requests from investors:
In the starkest sign yet of the strain on hedge funds, Tiger said last week that it couldn’t continue to fill redemptions the normal way because so much of its portfolio was invested in hard-to-sell stakes in private companies. As the firm saw losses and some redemptions in the first quarter, it exited 83 stocks. Now if investors want to pull money from Tiger’s hedge and long-only funds, a portion of the liquid assets will be sold, but private investments will be placed in a separate account to be cashed out later.
I expect a similar move at D1 soon.
This isn’t the first time D1 has gotten itself into trouble.
According to a report in The Wall Street Journal, it lost 30% of its public portfolio in January 2021. As meme stocks soared, D1 was badly burned by short positions.
The overall impression I have of D1 is of a reckless firm casting about in vain for a winning strategy. It rushed into venture capital with a risky and untested scheme, then lost a fortune betting against volatile meme stocks.
Were I an investor in the firm, I’d be asking for my money back. The question is: can you get it?
What do you think of D1’s losses? And who do you think is next?
Leave a comment at the bottom and let me know!
This is the last blog for this week. There will be no blog next week — I’m heading off for a vacation!
See you on Monday, June 20th. Have a great weekend! 👋
More on markets:
Hedge Fund Tiger Global Losing $136 Million a Day, Down 52%
$6B Hedge Fund Cut Off from Trading As Investigation Looms
Citadel Adds Millions to AMC Options Bet
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