Light Street picked up in January where it left off last year, in a determined bid to return to its high-water mark.
The hedge fund firm’s long-short fund climbed 12.42 percent last month as its long-only fund gained 6.4 percent, according to someone familiar with the firm. The difference in performance seems to suggest that Light Street’s hedge fund was boosted by its shorts as well as its longs.
Light Street also disclosed in its fourth-quarter client letter, obtained by Institutional Investor, that it is launching a new hedge fund, Light Street Photon. This is the Tiger Cub’s first fund dedicated to long-short investing in public companies in the technology hardware sector — semiconductors and electric vehicles, among others, the firm noted.
“Many investors have significant technology exposure from Light Street and other generalist long‐only and long-short vehicles,” founder Glen Kacher elaborated in the letter. “However, many non–Light Street investment vehicles are underexposed to the hardware segment of the technology industry.”
The launch is no doubt related to Kacher’s larger belief that the world is undergoing an “unprecedented AI infrastructure build. We believe Photon could help prospective investors to rebalance their total technology exposure to achieve a far higher allocation of assets to the attractive hardware sector,” Kacher wrote in the letter. He also said he expects to launch the new fund no later than the early part of the second quarter.
Light Street declined to comment.
The hedge fund firm is currently riding the surge in a number of the Magnificent Seven stocks. At the end of the third quarter — the most recent period for which this information is available — four of the firm’s six-largest U.S. longs were members of this elite group of market performers.
They included chip giant Nvidia, Light Street’s largest long in the second and third quarters, accounting for nearly 14 percent of assets at the end of September. In January alone, the stock jumped more than 24 percent. Last year, it was the stock market’s top performer after more than tripling in price.
Light Street’s three other Magnificent Seven positions were Meta Platforms, Microsoft, and Alphabet. In January, they were up 10 percent, up 5.6 percent, and roughly flat, respectively. On Friday, February 2, alone, however, Meta went up a further 20 percent or so after reporting strong quarterly results and Nvidia rose 5 percent. (Kacher recently told CNBC that it subsequently liquidated its Alphabet stake.)
So just two days into February, Light Street was no doubt off to a strong start to the month.
In the letter, Kacher hammered home his case for aggressively emphasizing AI-related investments. “The back half of the 2020s will bring with it an inflection in both technological capabilities and global economic impact,” he said. “Studying this evolution remains the top priority of our team as we position our portfolio to capture this immense value-creation event.”
Kacher stressed that current capital intensity and scarcity of talent favor the large-cap technology bellwethers. His team anticipates regulatory challenges as new AI‐powered solutions emerge.
“However, the dominant positions of major technology companies are well established,” he continued. “With their extensive customer bases, data, distribution networks, skilled workforces, and financial resources, these companies are well positioned to secure a significant role in the AI industry’s future.”
Kacher warned that although hedge fund exposure to the Magnificent Seven is currently in the 90th percentile and the stocks have performed phenomenally well, they are not likely to be the best AI plays: “We are not convinced that these are the most impactful seven stocks to own in order to capture AI returns going forward,” he wrote.
Kacher detailed three areas of differentiation within the hedge fund firm’s approach that he believes “will yield fruitful results in the coming years.” For one, Light Street over the near term is emphasizing infrastructure and platform layers. “We believe this represents the best risk‐adjusted use of capital in a very uncertain environment for the prevailing AI application form factor,” Kacher explained.
He also stressed Light Street’s nearly three decades of expertise in Silicon Valley, which make the firm “uniquely positioned” to identify winners and losers in the semiconductor industry. The hedge fund manager added that though Light Street remains “steadfast in the strong position of large-cap tech businesses,” it continues to balance its exposure between the very large winners and “high-conviction asymmetric opportunities less likely to be found in portfolios of others.”
Kacher said that the “arms dealers” of technology hardware will be the first to enjoy AI-related revenue and, ultimately, shareholder returns. Taiwan Semiconductor Manufacturing “epitomizes” the firm’s definition of a tech infrastructure arms dealer, he added, noting that the company has become one of the most dominant companies in the applied technology sector and that more than 10 percent of its revenue is directly related to AI.
In fact, Kacher likes to say that Taiwan Semi is one of five stocks that make up what he calls the AI5 — the others being Miscrosoft, Nvidia, Advanced Micro Devices, and Broadcom.
Kacher asserted in the letter: “We have a playbook, we have seen these tectonic shifts before, and we intend to capitalize on the opportunity for our investors. Every investor, small and large, must be allocated to public technology equities in a meaningful way; not doing so risks one of the largest opportunity costs in modern investment history. The biggest risk in this environment is the risk of not participating in the value creation of AI.”