There are currently 587 active hedge funds tracked by Preqin’s Hedge Fund Analyst with exposure to the technology, media and communications industries. These funds account for $116bn in assets under management. Social media has a significant stronghold over society today and as a result, high profile IPOs for technology companies such as Facebook Inc., Twitter Inc. and LinkedIn Corp. have offered profitable opportunities for hedge funds.
According to data from Preqin, technology hedge funds achieved benchmark returns of 15.86% in 2013 and 13.03% in 2012, comfortably exceeding the Preqin hedge fund benchmark which posted returns of 11.73% and 10.63% in these years respectively. The industry has performed well over the last two years but is still vulnerable to crashes in tech stocks as seen in March and April this year, with Preqin data showing that the overall technology industry benchmark was down 0.50% and 0.27% during these months respectively. Although these losses do not appear to be that significant at an industry level, the data also shows that the worst performing hedge fund exposed to the industry suffered heavy losses of over 17% in March alone. However, the industry recovered its losses towards the end of H1 following steady returns of 1.46% in May and 1.62% in June.
Despite strong performance over the last two years, Preqin data shows that technology hedge funds suffered heavier losses than the wider industry during the last two major market crashes in 2008 and 2011 with losses of 24.5% and 4.7% in these years respectively. These funds are correlated to equity markets as most hedge funds favour the publicly traded technology heavyweights and the more established brand names. However, there appears to be a shift in attitude towards investing in technology stocks, with more hedge funds placing emphasis on venture capital and making investments in pre-IPO companies.
One hedge fund following this approach is Coatue Management, the $7bn technology-focused hedge fund which has been actively participating in venture capital fundraising rounds for several new start-up technology companies such as Snapchat Inc. and Box Inc. Indeed, Coatue Management was the sole investor in a Series C fundraising round for Snapchat Inc., investing $50mn.
There are an increasing number of traditional technology-focused hedge funds that are moving their investments away from the more established players in the technology industry to instead focus on the hottest new prospects coming out of Silicon Valley. With the shift in focus and strategy of these hedge funds, the spotlight will be firmly on how they navigate their way through the second half of this year.