Light Street Capital is suffering through one of the roughest stretches in its nine-year history.
The technology-oriented firm’s hedge fund — Light Street Halogen — posted a 12.3 percent loss in the third quarter and lost another 3.8 percent in October, according to its third-quarter letter to clients that was obtained by Institutional Investor. As a result, it was down 2.5 percent for the first 10 months of the year, according to an investor.
“While recent performance has been frustrating, we have been through difficult periods in the past and are confident we will manage through it,” Light Street told clients in the letter, dated November 13. The Tiger-cub hedge fund, headed by Glen Kacher, attributed the firm’s recent woes to a “bevy of macro and geopolitical uncertainties.”
In response, Light Street is now running at the lower end of its historical net and gross exposure. The firm has also “reduced the valuation differential” between its long and short bets, shifting some of its long exposure into more “all weather” ideas with higher earnings or cash flow “valuation support,” according to the letter.
Light Street is also using the selloff in many of its previously successful positions to increase its highest conviction bets. For example, the hedge fund firm added to its position in Pinterest, which went public in the spring, according to the letter.
Light Street declined to comment.
In its letter, Light Street said the firm’s strategy is inherently volatile but over the long term “it has a track record of generating uncorrelated returns and outperforming broad‐based global indices with roughly half the market exposure.”
Through the third quarter Halogen has produced a total return of more than 317 percent since inception, according to the letter. This is in line with the Nasdaq Composite, but much greater than the 240 percent gain for the S&P 500.
The star of the third-quarter show was Light Street’s short positions, which contributed a 2.7 percent gross return on a 73 percent short exposure, according to the letter. The biggest contributors were two recent software IPOs and a Chinese electric car company. Light Street did not disclose the names of the companies.
Light Street attributes most of its third quarter losses in the long book to market rotation rather than “a decay in fundamentals.”
The firm said in the letter that its three largest long detractors were online luxury goods retailer Farfetch, software company Slack, and streaming video giant Netflix. Still, Slack and Netflix reported solid earnings results. “Both businesses remain top ten positions and offer even more compelling risk adjusted returns at current levels,” the hedge fund told investors.
On the other hand, Light Street concedes it was disappointed in Farfetch.
Among its largest contributors to the long book in the third quarter was Pinterest, the online social network. Light Street held an investment in the company before it went public earlier this year. Pinterest and Slack were the first two investments made by Light Street Beacon, its new, late-stage-growth private equity fund, according to an earlier letter.
According to Light Street’s recently filed 13F document, the hedge fund firm cut its stake in Pinterest by 61 percent in the third quarter. However, according to a person familiar with Light Street, Pinterest is currently a top-five position. The firm holds the investment through its side pocket. The firm has boosted its stake since the end of the third quarter, according to the same individual.
In the third-quarter letter, the firm points out Pinterest is currently the fourth largest social platform excluding China, behind Facebook, Snap, and Twitter. The company has 322 million monthly average users globally and its user base is growing nearly 30 percent year-over-year, Light Street said, about double any of its peers.
Pinterest is an ad-based business whose content is generated by its users. The company has no traffic acquisition costs, which Light Street stresses is one of Google’s largest costs. Pinterest also spends much less on data storage than its peers because it doesn’t host significant high bandwidth video content, the hedge fund firm said.
“As a result, we think Pinterest will look a lot more like Facebook from a gross margin perspective in two to three years versus Twitter or Google,” Light Street said. “We expect Pinterest to have long‐term EBITDA margins in‐line with Google and Facebook.”