This Hedge Fund Lost Big Last Year — But That Didn’t Scare Investors Away

Strategy Capital, a tech-focused hedge fund, is a reminder that one year of performance doesn’t make or break a manager.

Illustration by II<br/>

Illustration by II

Strategy Capital, like many managers of technology stocks, had a rough 2022. But the long-only, tech-focused hedge fund’s dismal performance — it was down 65 percent — doesn’t seem to have turned off investors.

Bill Mitchell, partner and managing director, said Strategy Capital didn’t lose a single investor and had its best fundraising year since it started in 2013. The fund attracted more than $200 million from new and existing clients, bringing its total assets under management to nearly $600 million.

Investors knew what they were getting into. “I think we were reaping the rewards of curating our investor base very carefully to make sure that we had people that understood what we do. That volatility is inherent to what we do,” Mitchell said.

Strategy Capital was founded by Hamilton Helmer, who worked at Bain & Company and taught business strategy for 10 years at Stanford University, and John Rutherford, who worked at Bain & Company and co-founded private equity firm Parthenon Capital and management consultant Parthenon Group. The co-founders’ investment approach is based on the business strategy lessons of Helmer and detailed in his 2016 book called “7 Powers: The Foundations of Business Strategy.”

It’s all about fundamental-value analysis. The hedge fund analyzes empirical characteristics of companies to determine the firms that are most likely to dominate emerging industries. It tracks a universe of roughly 50 publicly traded U.S. companies. The others aren’t meaningfully different from competitors and in that scenario “everything comes down to competition by price, nobody makes any money, and there’s no value,” Mitchell said.

Put another way: Strategy Capital believes there are still growing technology companies out there that ultimately can achieve the size and earning power of a Google or Amazon, Mitchell said.

Although the firm declined to comment on specific investments, regulatory filings show that Strategy Capital has previously invested in Facebook parent Meta Platforms, Amazon, Shopify, cloud-monitoring service Datadog, and cybersecurity company Crowdstrike.

It’s worked out well so far, even with last year’s losses. Since inception, Strategy Capital has generated a 16.2 percent annualized return, net of a hypothetical 1 percent management fee and 20 percent incentive fee, above the S&P 500 total return index. That translates to 4.4 percent of annualized outperformance relative to the S&P 500, the firm told its investors in a February letter obtained by Institutional Investor.

Dramatic moves in interest rate expectations have made Strategy Capital’s performance especially volatile in recent years, according to Mitchell. The fund was up 107 percent in 2020, and 18.9 percent in 2021, in sharp contrast to last year’s decline.

The hedge fund is up 19.1 percent year-to-date compared to the S&P 500 index’s 3.7 percent, which Mitchell said could be a sign of the new market regime already separating the best companies from the others.

“There was, in my view, a selloff last year of high-growth stocks without regard to quality. Among the many things that have sold off, there are a handful [of companies] that have significant earning power and the market will start to grasp that,” Mitchell said.

Even as companies stay private longer, Strategy Capital has stuck to investing in public stocks, which it believes can still generate great returns if you invest in companies that will become tomorrow’s “iconic businesses,” as the firm described them in its 2022 annual letter.

In 2019, the founders, like most hedge funds, wanted to expand its client base from wealthy individuals to institutions.

The year before, a Boston-based institution was interested in Strategy Capital but the investor needed some things to change, Mitchell said.

For one, the fund needed a succession plan. That’s when Strategy Capital hired Mitchell, who has known Helmer since 2000. Mitchell, who had been running his own $200 million public-equity fund since 2012, had plenty of tech experience, including as a developer at Apple and worked at startups before and after Stanford.

Institutional investors also want to see familiar brand names, according to Mitchell. So the fund started using BTIG as a prime broker and hired KPMG.

Strategy Capital also hired a consultant to help it navigate due diligence from institutions. Even small details matter, the fund learned, such as a computer server cage that is locked, offsite backup systems, and cybersecurity protection.

Proving it had capacity was easy. Even though it is highly concentrated, Strategy Capital deals in highly liquid stocks, so it could handle big checks from institutions and meet monthly redemption terms — even at $5 billion under management or more, Mitchell added.

“This was as much about taking the time to understand the kind of operational and due diligence needs of the institutional investor as it was about our performance and investment strategy,” Mitchell said. “Not that those aren’t important. It’s not either or. Performance is just the starting point of opening that door.”

The effort has paid off. In 2018, the first university endowment invested in the hedge fund. Now two Ivy League investment offices are investors, although Mitchell declined to name them.

“Then it was word of mouth once we had broken through that institutional glass ceiling,” Mitchell said.