XN, one of this year’s biggest new hedge funds, has returned 46% in its first five months of trading and sees opportunities to bet against the growing number of listed companies via blank check vehicles.
The performance gains of the New York-based investment fund, which raised more than $ 1 billion when it launched in July, came from positions in companies such as social media group Pinterest and fashion retailer. luxury online Farfetch, according to a letter to investors consulted by Financial Times.
Gaurav Kapadia, founder of XN, said in the letter that the fund also sees opportunities to bet against an “ever-growing crop of new public companies”, including groups that have gone public through acquisition companies at special vocation, where “in many cases the incentives are precisely wrong”.
Spacs – which raise liquidity on the stock market and seek a private company to go public – have become the hottest commodity on Wall Street this year.
Vehicles, also known as blank check companies, can create big profits for their sponsors, who receive a 20% stake that turns into a potentially lucrative share of the capital of the merged company. Some governance experts have warned that this structure can create misaligned incentives, leading Spacs to bad business at the end of their typical two-year lifespan.
“In some cases, these companies have fueled ‘story hysteria’,” Kapadia wrote in the letter to investors. “When economic reality inevitably sets in, we think there will be a major downside.”
XN’s gains are notable in a year that rocked the hedge fund industry, with market fallout from the coronavirus pandemic creating big gaps between winners and losers.
Mr. Kapadia started XN after leaving Soroban Capital, an equity hedge fund manager he co-founded in 2010. Soroban capital returned of its flagship strategy of more than $ 4 billion in 2018 to focus on a more concentrated equity portfolio.
XN started as a family office in 2019 and started trading outside the capital in July. Over the next five months to the end of November, the S&P 500 Index gained 16.8% and a Hedge Fund Research index for equity funds, in comparison, rose 13 percent.
The fund gained 19.6% in November alone, according to the letter to investors, a month when the S&P index was up 10.8%.
XN “hadn’t anticipated the pace of returns” this year, Kapadia said, and had swiftly shifted money from “low-yielding investments to higher-yielding opportunities” since October. He said more than half of the fund’s returns came from stocks with market capitalizations of less than $ 25 billion.
XN investors agreed that up to 35% of their capital would go to private investment, an increasingly popular strategy for new hedge funds. By placing money in less liquid areas of the market, such as unlisted securities, managers hope to generate higher returns.
Mr Kapadia said that XN has so far made four investments in private companies, including Impossible Foods plant-based meat company and orbital rocket maker Relativity Space.
The letter also stated that XN had engaged Jan Bennink, a seasoned consumer negotiator, as an executive partner working on new investment opportunities.
Mr. Bennink is best known as a CEO who got extremely high valuations when he sold his businesses. Dutch executive sold baby food group Numico to Danone for 17 billion dollars in 2007 and then sold the DE Master Blenders coffee maker to JAB for around $ 10 billion in 2013.
“We have followed Jan through shutdowns at multiple companies, in different regions, executing different strategies, in multiple categories,” Mr. Kapadia wrote in the letter. “Each time, Jan led business transformations while demonstrating a flawless business instinct.”
Bennink, who will help XN choose its investments in the United States and Europe, will join, respectively, Carl Bass and Rob Marcus, former executives of the software group Autodesk and cable operator Time Warner Cable, who have been with XN since February.