July 20, 2022

Breakingviews: Why is Tiger dodging family office-dom?

by Breakingviews.

Tiger Global Management is a rare species in the hedge fund world. Often rivals such as John Paulson would close down their business to outside investors after their funds posted huge losses. But Tiger’s Chase Coleman managed to avoid the same fate. Investors might wonder how he got here.

Tiger invested heavily in technology companies such as second-hand car dealer Carvana and cryptocurrency exchange Coinbase Global, whose valuations have suffered dramatically since the beginning of the year. Tiger’s two funds that mainly invested in public-listed stocks posted combined losses of nearly $20 billion as of end of May, LCH Investments estimates. That wiped out more than 70% of value the two funds gained for investors over the past two decades.

Such missteps require some soul-searching for fund managers. They often structure fees using a so-called high-water mark, which means the fund can’t keep earning performance fees – typically 20% of gains – until cratered valuations get back to a certain level. Rather than work for years to earn that back, some have decided to close up shop. John Paulson converted his firm into a family office in 2020 after things soured. Melvin Capital, which bet against GameStop, shut down the fund in June after it lost 23% in the first four months of this year.

Tiger’s arrangements with investors have allowed it to keep going. It will halve its performance fee on its hedge fund until it makes up more than 100% of lost investor cash, according to Bloomberg. Yet even at 10%, that isn’t a small cut. Coleman also restricted how much money investors can withdraw in a year. So he has some certainty he will have something to manage next year.

That seems a slightly more genuine – and transparent – way of managing money for investors, rather than closing to run a “family office” only to hit the reset button on the high-water mark. The catch is that portfolio managers don’t want to work for lower fees, especially when it looks as if the value of the portfolio is unlikely to recover fully any time soon. Tiger has managed to keep investors around. The key, now, is ensuring the managers don’t walk out the door.

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