You must know about the cautionary tale of Tiger Global

The US-based firm's almost two-decade-long roar reduced to a feeble meow in 2022. Here's what you can learn from it.

You must know about the cautionary tale of Tiger Global

Never heard of Tiger Global. What's that?
A hedge fund based in New York (US), it was founded by Charles Payne 'Chase' Coleman III in 2001.

Hedge fund?
Put simply, these are investment companies that pool money from investors - usually wealthy people - and then use aggressive strategies to deliver outsized returns.

Basically, they are similar to how a mutual fund works, but for the ultra-rich.

Launched in?
2001. Started with $25 million. The money was given to Coleman by his mentor, Julian Robertson, a legendary fund manager himself.

How big did they get?
By 2021-end, it was managing a dizzying $125 billion, as per the Securities and Exchange Commission.

That's huge! How did they achieve so much?
Tiger Global bet big on technology stocks, and its gravy train started rolling when it struck gold in Chinese tech stocks. In 2007, the fund reported more than 75 per cent returns on its investments.

The years between 2019 and 2021 were decidedly blockbusters. Their assets grew threefold, spurred by rocketing tech stocks and cryptos.

Furthermore, its venture capital arm extended bets on startups and private firms worldwide.

As per Wall Street Journal, the venture business' initial investment of $71 million grew to $823 million - more than 11-fold return on their investment. There was no turning back after that.

In fact, encouraged by their success, the venture business went on an investing spree during the heady days of 2020 and 2021.

Things were going swimmingly well for them.
So much so that its venture fund manager, Scott Shleifer, bagged Donald Trump's $122.7 million Palm Beach property in a snap!

Coleman, the owner, was less flashy. He splashed out $36.5 million for a Manhattan property, $52 million for another flat in the same building...

I get the Wolf of Wall Street vibe. But when did their world turn upside down?
This year. The hedge fund's investments tanked by an eye-watering 50 per cent in the first six months of 2022. In May, the fund bled $17 billion; the June numbers were even more grim: $25 billion. Some of the initial investors lost three-fourths of their gains in a single year.

Reason? Tech stocks came crashing down to earth this year - and that's where Tiger Global had invested big-time.

Their risky venture fund investments turned sour too. Take the example of Peloton, an internet-connected exercise equipment company. Tiger Global had a 20 per cent stake that was once valued at $6.5 billion - but all these gains vapourised as Peloton's stock price plummeted almost 95 per cent this year.

95 per cent loss!
Tiger Global was investing in company stocks that were priced exorbitantly, especially consumer-focused tech stocks.

Until last year, some of these companies were trading at 30-times sales ratio. For instance, companies with a revenue of Rs 30 crore had a market capitalisation of Rs 900 crore!

India isn't immune from such head-scratching valuations either. When Nykaa made its debut in the stock market, Value Research CEO Dhirendra Kumar questioned how a fledgling company, despite having a great management, could justify having a market capitalisation of Rs 100,000 crore by actually making around Rs 60 crore.

I am a basic investor and don't bother much about stocks. What's the cautionary tale you were talking about?
True, before Nykaa gives us a black eye, let us swiftly move on to the lessons we can learn from Tiger Global's riches-to-rags story (though we must add the company has vowed to rebound).

  • Tiger Global took a sector fund-like approach. In plain speak, they put all their eggs in the tech sector, which means they were vulnerable to the downswings of the sector.
    All sectors are cyclical; they have good times and bad. So, the onus lies on you to get in and out of sector funds. But having said that, it's very difficult to predict the cyclicality of any sector. If the savvy suits at Tiger Global failed to see the downswing...
  • Instead, we should focus on diversifying our investment. Mutual funds work best as it spreads your investment across different sectors. And if a fund manager - the person overseeing the performance of a mutual fund - feels that exposure to one sector needs to be increased/decreased, they can do so easily.
    However, sector funds can't do that as it is supposed to invest in that particular sector, even if it is going through terrible times.

Moral of the story: Diversify. There is safety in numbers.

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