Evan B. Morris March 25, 2016
Amidst plateauing global equity markets, hedge funds poured into the VC asset class in recent years. According to data from the PitchBook Platform, overall investment activity peaked in 3Q 2015 when hedge funds went in on 41 venture deals. The tide has turned in 2016, however, as hedge funds are on pace to complete the fewest quarterly VC deals in several years. We exclude Tiger Global Management, the most prodigious hedge fund investor in the space, as the capital invested from the $20 billion asset manager’s several multi-billion dollar venture funds skew the data.
(Note: To avoid the potential distorting effect of outliers, a previous version of this graph did not include the Uber and Didi Kuadi rounds but has since been updated for clarity.)
Hedge funds have participated in venture deals worth just $617.8 million and involving only 21 startups in 2016 so far. This represents a massive change in pace from the same quarter last year, when VC deals with hedge fund involvement took in $3.5 billion ($4.4B including Tiger) across 37 rounds. By comparison, overall U.S. venture capital invested fell a more modest 17.4% from 2Q to 4Q of last year. The blockbuster 2015 was in part due to hedge funds buying into late-stage megadeals, like Coatue Management and DE Shaw did by participating in last September's $3 billion round for Chinese Uber competitor Didi Kuadi.
Unlike the long lockups of traditional venture funds, hedge fund mandates typically leave them vulnerable to investor redemptions, limiting their ability to allocate capital to illiquid private investments. Daily mark to market accounting may also require funds to mark down private valuations when public comps decline on the day. In an uncertain environment, hedge funds must prioritize core short term allocations and liquidity over extended due diligence into opaque private companies.
The best performing hedge funds have been bullish on startups. San Francisco-based global macro fund Passport Capital has been the fifth-most prolific hedge fund investor in VC, despite a relatively modest $4.4 billion AUM. The fund was reportedly one of the biggest winners of 2015 after betting against emerging markets, commodities producer Glencore and high-yield credit.
In a RealVision TV interview this fall, Passport founder and CIO John Burbank expressed confidence in the continued outperformance of Silicon Valley over a slowing overall global economy. His investment in startups is part of a broader macro thesis of clustering: “You’re not going to win owning most average businesses; what’s going to win are the A students in the class, clustered together in companies and in cities like San Francisco.” However, Passport hasn't closed a venture round since September, when it backed foodtech startup Clear Labs.
Here are the top 11 hedge funds by active VC investments:
1. Tiger Global Management (119)
2. D.E. Shaw (43)
3. Maverick Capital (39)
4. Two Sigma Investments (33)
5. Ironridge Global Partners (26)
6. Och-Ziff Management (23)
7. Passport Capital (18)
8. Coatue Management (17)
T9. Perceptive Advisors (16)
T9. Elliott Management (16)
T9. Cormorant Asset Management (16)
For the latest data on venture capital, private equity and M&A, check out the PitchBook Platform.