It's easy for investors to take big bets on companies like Google and Facebook. It's much more challenging to find the fledgling startup that is set to become the next industry titan.

For decades, hedge funds have dominated public markets, through activists demanding major changes at blue-chip stocks or quants supercharging the speed of trading. Now managers are turning toward private markets, investing billions into top startups. 

The patience of many of the hottest companies in the world pulled the industry in. In 2020, 20 unicorns went public, including Airbnb and Palantir. These companies waited an average of 11 years before going public, compared with just five years in 2011, according to an analysis by the Financial Times. 

"To many of our clients, the private markets have become increasingly important over the past few years, and we only expect continued growth in the space," said Tiger Williams, the founder of Williams Trading, a trading-execution firm that has clients in public and private markets. 

Managers like Tiger Global are pumping so much into private markets that traditional venture capitalists are grumbling that they can't find any deals for their own clients, and more firms are expected to get in. A new hedge fund from Alex Karnal and the former Bridgewater executive Brian Kreiter, named Braidwell, plans to invest across public and private healthcare companies, for example.

Insider compiled a list of the top 20 dealmakers at the most important shops. Titles vary from analyst to founder, but all are heavy hitters in their section of the market. 

Scott Shleifer, head of private equity, Tiger Global

While many funds have just recently come around to private markets, Tiger Global has been involved for close to two decades, thanks to Scott Shleifer.

He heads Tiger Global's private-equity investing arm, a practice he cofounded with the billionaire firm founder Chase Coleman in 2003. He was an early investor in China but has invested in startups based in the US, Latin America, India, and Russia, among others.

Since its inception, Tiger Global's private-equity business has invested in more than 400 companies in more than 30 countries and has produced a net internal rate of return of 26%, according to a person familiar with the firm. This year alone, 22 of Tiger Global's portfolio companies have gone public, representing $2.2 billion of investments and about $7.5 billion of gains. 

The success has been good for Shleifer personally as well. He bought one of the most expensive homes ever sold in the US, a $122.7 million Palm Beach, Florida, mansion, earlier this year.

Brian Kaufmann, head of private investments, Viking Global

Another Tiger Cub on the list, Viking Global is one of the biggest crossover firms in the space. The Wall Street Journal reported earlier this year that the manager is planning to raise $1 billion for a dedicated private-equity fund that will close on October 1.

The firm led a $130 million round for the cloud company Druva in 2019 with $107 million coming from Viking alone, pushing the startup into unicorn territory. This year, Druva raised money at a $2 billion valuation as Viking's investment has doubled in less than two years.

Brian Kauffman leads the private-investment team for Viking, and in 2019, the firm told investors that it was adding two members to the five-person team to keep up with demand. The firm also placed early bets on Uber and BridgeBio Pharma, both of which have gone public.

Chris Garabedian, founder of Xontogeny and portfolio manager of Perceptive Advisors' venture funds

Chris Garabedian spent more than two decades working at various biotech companies before switching to the investment side with his startup incubator, Xontogeny.

Looking for capital for Xontogeny, Garabedian had conversations with the healthcare investor Perceptive Advisors, run by the billionaire founder Joseph Edelman.They reached a partnership in which Xontogeny would continue to incubate young companies, but Garabedian would invest within the Perceptive framework via a venture-capital fund. The first fund, which raised $210 million in 2019, was rapidly deployed, and they raised $515 million — with an overall demand of $1 billion — for the second fund, Garabedian said.

The partnership between his incubator and Perceptive has let Garabedian get in early on some of biotech's promising players, such as Bioharmony Therapeutics, which is working to develop treatments to antibiotic-resistant bacteria.

"We can take our best ideas and call up Adam and say we want a read from your best analyst on this," he told Insider, referring to Adam Stone, Perceptive's chief investment officer. "If you like it and we like it, then we know we are onto something. If all goes well, I've already kind of pre-cleared the next investment."

Edwin Jager, head of fundamental equities at DE Shaw

The quant giant DE Shaw might not be the first firm that comes to mind when you think of private-market investing, but the $55 billion manager invests in the startups through its fundamental-equities strategy, run by Jager. The strategy includes traditional long/short, special situations, activism, and privates, and takes long-duration, concentrated positions, with a fair amount of attention on the technology, media and telecom, including fintechs.

DE Shaw looks globally for startup investments, especially in China, where Jager said the firm has found deals through word of mouth from its team in Hong Kong. To run due diligence on potential private bets, the firm uses alternative data sources to get a sense of a company's standing in an industry.

Private investing "has been a focus for our team over the last several years, and we expect it to remain so," he said. Past private investments from the firm include Spotify and the internet-of-things company Altierre, which DE Shaw was the lead investor in.

Dan Gwak, managing partner, Point72

Dan Gwak is the point man for the billionaire Steve Cohen on all things private markets. Before joining Cohen's firm, Gwak was a partner at In-Q-Tel, an investment firm that finds technology companies that can support the US intelligence community.

Point72's private-investing business includes two arms — the firm's venture-capital business and Hyperscale, an artificial-intelligence-driven private-equity business. Hyperscale, which started in 2019, uses AI to help its portfolio companies become more efficient and profitable.

The ventures team is more robust, with more than 30 people on the team, the firm said. The business invests Cohen's personal capital as well as that of other Point72 employees, and it has written checks from $250,000 to $50 million since it launched in 2016. Combined, the two businesses have deployed more than $500 million, and investments from the venture side include Privacera, Acorns, DriveWealth, and dozens of others.

John Curtius, head of software investing, Tiger Global

A member of Business Insider's 2020 list of rising stars in finance, Curtius is well known to private software companies looking for their next infusion of capital.

The Los Angeles native got his feel for the private markets when he started his career at the private-equity firm Silver Lake before moving to the hedge-fund world with time at Paul Singer's Elliott Management. He joined Tiger Global in 2017 and has been a part of investments into startups such as Snowflake, Databricks, Hyperscience, and more.

Alex Sacerdote, founder, Whale Rock Capital

Alex Sacerdote has run $13 billion Whale Rock since 2006 but only began investing in private markets last year. After testing the waters though, the firm has dived into the space, putting $800 million into 20 investments since last April. Checks written by the firm have ranged from $15 million to $100 million.

Names include the Brazilian fintech giant Nubank as well as Divvy, Confluent, and HashiCorp. A person close to the firm told Insider the private-investing strategy is not all that different from how the firm, which invests primarily in technology, evaluates public investments. The investment team evaluates both public and private opportunities simultaneously.

The manager is focusing on later-stage private companies right now and has seen some immediate results — of the nine private investments the firm made in 2020, three have had IPOs, another has been acquired, and one filed to go public.

Michael Lee, head of private investments, Lone Pine Capital

Along with being an analyst on Lone Pine's 14-person investment team, Lee is also in charge of finding private investments for the Tiger Cub, which was founded by the billionaire Stephen Mandel Jr. and now run by the firm's three portfolio managers, David Craver, Kelly Granat, and Mala Gaonkar.

Among Lee's responsibilities, beyond searching for investment opportunities, is connecting with other private investors who can serve as potential partners in funding rounds, a person close to the firm told Insider. The firm's private-investing focus is in e-commerce, software, and payments, and Lone Pine recently told investors in a letter this year that it is increasing the percentage of its flagship fund that can be invested in private companies from 5% to 15%.

Private bets, which have to be unanimously approved by Craver, Granat, and Gaonkar, include Sweetgreen, Glossier, Outreach, and Torchy's Tacos, among others.

Gaurav Kapadia, founder, XN

The Soroban Capital cofounder Kapadia was originally trading under XN as a family office before accepting outside capital and launching as a hedge fund 12 months ago.

According to the Financial Times, which reported on a letter Kapadia sent investors at the end of last year, his fund can invest up to 35% of assets into private companies. The firm's private portfolio already includes at least 10 investments, including Impossible Foods, the chipmaker Groq, and AMP Robotics. XN led the Series B round for AMP Robotics and the Series C for Manticore Games.

Dan Sundheim, founder, D1 Capital

Viking Global Investors' ex-chief investment officer Dan Sundheim has made waves in private markets since he started his own fund, D1 Capital, in 2018. A little less than a third of D1's capital was invested in private-market bets, Insider reported last year.

This year, the $21 billion hedge fund, under Sundheim's guidance, has led more than 35 investments in privately held startups across the globe, including in the corporate spend management software Ramp, the e-commerce grocery platform Instacart, and the Hong Kong-based trucking company Lalamove.

The fund has also made some high-profile exits in 2021 as portfolio companies like Squarespace and DLocal went public. Sundheim, a legendary networker who one former colleague called "the LeBron James of investing,"hosts a group chat for founders of his portfolio companies to connect and is known for sending late-night musings on the market to them. 

Paul Eisenstein, founder, Vetamer Capital

A new fund that just launched at the beginning of the year, Vetamer aims to play in both the public and private markets and in fintechs. Founded by the Lone Pine veteran Paul Eisenstein, the $350 million manager has already made a few private investments, including the UK-based digital bank Monzo's latest round.

Internally, the managing director Matt Heiman runs point on private investments, with Eisenstein having the final say in all decisions. A person close to the firm described the manager's timeline as Series B and beyond, with a focus on a startup's fit in the overall market to justify the valuation.

Robert Schwartz, managing director, Third Point Ventures

For more than two decades, Robert Schwartz has run the venture arm of the billionaire Dan Loeb's firm out of Menlo Park, California. The firm's investments run across different sectors, primarily technology and healthcare, with a special focus on fintech.

Current portfolio holdings include the Fortnite creator Epic Games and Grab, the Southeast Asian food-delivery app. The firm invested in companies like Lyft, SoFi, and Palantir while they were still privately owned.

Glen Kacher, founder, Light Street Capital

From Series B to Series F, Light Street Capital has been active in private markets, investing in some of the more promising technology startups, including Chime and Toast.

The founder Glen Kacher played the private markets long before it was typical for hedge funds to do so. He worked at the hedge fund Integral Capital Partners and invested in private companies like OpenTable before starting his own fund in 2010. Integral was started by the early tech investors Roger McNamee, John Powell, and the partners of the venture firm Kleiner Perkins Caufield & Byers, and the firm's portfolio was 25% private companies.

At Light Street, Kacher and his deputies — a group that used to include Jay Kahn, a former partner who has started his own fund this year — are fundraising their second fund focused only on privates, according to Institutional Investor, with the goal of accumulating $350 million.

Prateek Bhide, principal, D1 Capital

The D1 Capital principal Prateek Bhide has followed in the footsteps of his boss, Dan Sundheim, leading growth-stage private investments in the tech sector in addition to public-equity investing. The wealth-management technology platform Addepar is one of his recent wins, with D1 Capital investing $150 million at a valuation more than $2 billion in June.

Bhide joined D1 in its first year, 2018, after five years investing at the hedge fund Farallon Capital Management and two years as an analyst in Blackstone's restructuring group.

Thomas Laffont, cofounder, Coatue

The Tiger Cub Coatue has made 25 private investments in the second quarter alone, making it one of the most active startup investors, rivaling large venture-capital firms, according to CB Insights. The firm, founded by the brothers Philippe and Thomas Laffont, leverages their complementary strengths, with Thomas leading its private-investment strategy.

Under Laffont, Coatue made a name for itself in the startup investing world through early bets on Uber, Lyft, and Snap, while its more recent investments include Airtable, Impossible Foods, and Rivian. Insider reported last year that in unicorn deals in which Coatue participated, it led the funding round half of the time.

Arielle Zuckerberg, partner, Coatue

The Coatue partner Arielle Zuckerberg, the younger sister of the Facebook cofounder Mark Zuckerberg, helped Coatue win a $30 million funding round for the video-streaming startup LiveControl against venture capitalists who were meeting with the firm that same week, Insider reported.

Zuckerberg, who formerly worked at the venture firm Kleiner Perkins Caufield & Byers as well as Google, connected with LiveControl's founder because of her deep understanding of their product informed by her hobby as a DJ. She joined Coatue in 2018 to spearhead their early-stage fund alongside the venture-capital veterans Matt Mazzeo, Yanda Erlich, and Matt Mulvey, per Forbes. 

Colin Beirne, partner, Two Sigma

The quant hedge fund Two Sigma brought its data science-based approach to venture investing in 2012, when Two Sigma Ventures was born. Since then, Two Sigma Ventures has made more than 75 investments, many led by the founder Colin Beirne. Beirne has led rounds at the machine vision startup Compound Eye, the robotics developer Anki, and the onboarding-services platform Remote. The venture firm leverages Two Sigma's data expertise in scoping out startups — it built a data-driven artificial-intelligence tool called Georges that creates a weekly list of prospects, Insider reported in May.

Beirne told Insider that Two Sigma Ventures was founded to leverage data science throughout three stages of the investment process — sourcing, evaluation, and support of companies. Beirne said that every year, 100 to 200 of Two Sigma's employees get involved in one of those three stages, partnering directly with Two Sigma Ventures to lend their expertise. 

The venture fund has its own pool of capital, separate from the firm's funds focused on investing in the public markets. 

"While we have a lot of advantages that come from Two Sigma, we operate more like a traditional venture-capital fund," said Beirne. 

Tom Hill, chairman of private investments, Two Sigma

The hedge-fund veteran Tom Hill was appointed to the newly created role of chairman of Two Sigma's private investment business in March. Hill is well known for his 25 years at Blackstone, including as president and CEO of its alternative-asset-management arm and board director of Blackstone Group. He helped build out Blackstone's hedge-fund solutions business from less than $1 billion to more than $75 billion in assets under management before he retired in 2018.

Hill has been advising Two Sigma ever since and now oversees all four of its businesses under the private investment umbrella — Two Sigma Ventures; Two Sigma Real Estate; Two Sigma Impact, a private-equity investment arm focused on workforce impact; and Sightway Capital, also a private-equity business, focused on data-rich companies. 

David Singer, partner, Maverick Capital

The billionaire Lee Ainslie's hedge fund Maverick Capital is not new to private investing. While its public-stock investments brought it lucrative returns ahead of its fellow Tiger Cubs earlier this year, it has been investing in private companies since 2004. The San Francisco-based managing partner David Singer launched and still leads Maverick Ventures, Maverick Capital's dedicated startup investment arm.

In April, Singer raised $600 million for Maverick Ventures' third fund, which is uniquely structured as an open-ended "evergreen fund" without an expiration date, Forbes reported. Singer, who himself is a three-time founder, has focused his efforts investing in healthcare and e-commerce. Notable recent wins include the South Korean e-commerce company Coupang's public debut this year and the primary-care clinic operator OneMedical's IPO last year after Maverick first invested in both in 2011.

Daniel Krizek, portfolio manager, Surveyor Capital

Surveyor Capital, a division of the Chicago-based hedge fund Citadel, is one of several arms of Ken Griffin's firm that invests in public equities, but lately it has expanded more into venture-stage private investments, particularly in healthcare and biotech companies. Surveyor has participated in funding rounds this quarter for Turnstone Biologics Corp., Nimbus Therapeutics, and NiKang Therapeutics, among others. 

Daniel Krizek, who has been with Surveyor since 2017, has led many of these investments in innovative segments like gene therapies, immuno-oncology, and cell therapy. Before joining Surveyor, he spent more than seven years at Bain Capital, where he invested in both private and public healthcare and biotech companies. A person familiar with Citadel told Insider that Krizek has been involved in more than 100 biotech deals in his career and that his team attends dozens of industry conferences and visits the labs of potential investments. 

Originally from the Czech Republic, Krizek has already invested in 35 private companies this year, 15 of which have gone public or were acquired. 

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Two of Michael Gelband's top tech personnel have left his $13.3 billion firm ExodusPoint Capital Management, sources told Insider.

Sonny Baillargeon and Anil Chandroth — the global head of infrastructure and head of data science — have left the New York-based multi-manager in the last month. It's unclear where the two are headed or who is replacing them. 

The pair were a part of the leadership team for the firm's 158 tech employees, a large team even for the tech-obsessed hedge fund space.

The firm has also recently lost two quant portfolio managers. Ryan Sandor is set to join Citadel's New York office in October as an index rebalancing portfolio manager, the Chicago-based firm confirmed in an email.  His exit comes as quant portfolio manager David Qian leaves for Balyasny Asset Management, which was first reported by trade publication Hedge Fund Alert.

The firm has been aggressive in adding to its team this year, a source close to ExodusPoint tells Insider, with 117 new people joining the manager since the start of 2021. That includes 20 portfolio managers, such as Erik Schiller, a former executive in Prudential's asset management business, and Frank Fehle, a former senior quant at Citadel who will manage money for Exodus exclusively at his Europe-based Ox Galton Partners. Both hires were previously reported by Bloomberg. 

The manager, which was the biggest hedge fund launch in history when it began trading in 2018 with $8 billion, has trailed its main peers in performance this year. It is up less than 3% through the first half of the year, sources tell Insider. The average fund returned nearly 10% through the same period, according to Hedge Fund Research, and ExodusPoint peers like Citadel, Millennium, and Balyasny have outpaced the firm so far this year. 

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China's Gaotu Techedu has been "the worst stock ever" for the activist short seller Carson Block.

The founder of Muddy Waters Capital told Insider in an interview that his short on Gaotu Techedu, an online-education provider, was "just brutal." Block shorted the company, formerly known as GSX Techedu, after concluding that up to 80% of its users were fake in a May 2020 report. 

"GSX was the worst stock because we lost money on it overall and because our trading decisions on it were repeatedly poorly timed, showing how difficult it was to short a stock we believe was massively manipulated," Block told Insider. 

Block declined to disclose whether he had a position in the stock, and the size of his initial short is unknown, but he told Bloomberg in a February interview he was still shorting it.

Block isn't the only prominent short seller that has gone after Gaotu Techedu, which closed at $3.32 on July 29 after trading at a peak of $149 in January. Grizzly Research has accused the company of drastically overstating its profitability in its US public filings, and Citron Research said it should immediately halt trading. Gaotu Techedu also got caught up in the implosion of the family office Archegos, which had built up a highly leveraged position in the name, according to reports.

Earlier this month, China pledged to scrutinize top companies in the country that list on US exchanges, which are mostly technology companies. Gaotu Techedu and other private education stocks have plunged since China's latest crackdown on companies attempting to go public in the US.

These regulations come after the US passed legislation, known as the Holding Foreign Companies Accountable Act, sponsored by Sen. John Kennedy. The law forbids trading foreign securities in the US if a company doesn't cooperate with Public Company Accounting Oversight Board audits in three years.

In June, the Securities and Exchange Commission came under scrutiny from Republican senators for delaying the implementation of the act, which was passed last year. 

Block said he believed Chinese President Xi Jinping knew the act would eventually lead the US to delist companies in China in the next few years, a move Block said Jinping was already on top of. 

"By the time HFCAA kicks in and authorizes or mandates the delisting, there certainly won't be any Chinese companies left to delist," Block said. "I think that's what Xi is trying to accomplish. So he's warning companies that IPOs in the US are over, and you better start thinking about how you delist from the US." 

With the recent massive sell-off in Chinese stocks, Block is unsure about making any quick moves in the space. Over the past several years, many companies have become adept at manipulating stocks, Block said. 

"We were looking at what happened with GSX and Tal and saying, yeah, the reality of the landscape was auditors had every incentive to go in and not confirm a fraud. … And we were getting our faces ripped off by the manipulation," he said. 

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It's easy for investors to take big bets on companies like Google and Facebook. It's much more challenging to find the fledgling startup that is set to become the next industry titan.

For decades, hedge funds have dominated public markets, through activists demanding major changes at blue-chip stocks or quants supercharging the speed of trading. Now managers are turning toward private markets, investing billions into top startups. 

Managers like Tiger Global are pumping so much into private markets that traditional venture capitalists are grumbling that they can't find any deals for their own clients, and more firms are expected to get in.  

Insider compiled a list of the top 20 dealmakers at the most important shops. 

Subscribe to see the full list here: 20 hedge-fund dealmakers who are beating VCs at their own game by pumping billions into the world's hottest private companies

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Hedge funds with big positions in Chinese companies will likely be proceeding with caution after the regulatory environment rocked markets over the last week. 

The rout, triggered by China's vow to probe the biggest companies in the country that list on US exchanges, wiped $400 billion of value off US-listed Chinese companies, which are mostly tech firms.

Some big-name hedge funds held some of the largest positions in Chinese tech titans at the end of the first quarter.

Billionaire Chase Coleman's Tiger Global Management is a huge investor in China. The $65 billion fund manager's largest holding was JD.com, as of the end of the first quarter, making up just under 10% of its public equities portfolio, filings show. Pinduoduo, an agriculture technology platform, was also among its top 10 holdings, and the manager had a bet of more than $1 billion on Alibaba as well, according to filings.  All three stocks have seen double-digit losses this year. 

According to reports, Tiger Global remains bullish on China despite taking a hit as a result of the regulatory crackdown. Bloomberg reported the fund holds the largest exposure to Chinese American Depositary receipts out of the top US hedge funds. A spokesperson for the firm declined to comment. 

Other firms like Sculptor Capital Management had a $350 million bet on Alibaba and D1 Capital Partners had a stake in JD.com worth more than $1 billion at the end of the first quarter.  Sculptor and D1 declined to comment. 

While some Chinese stocks have started to bounce back, investors could be rethinking investing in China.

How hedge funds have underestimated risk in China

China's pledge to crackdown on companies trying to go public in the US comes after the US passed legislation, known as the Holding Foreign Companies Accountable Act. The law prohibits trading foreign securities in the US if a company doesn't participate in Public Company Accounting Oversight Board audits in the next three years. 

China's secular slowdown in their economy combined with their antagonistic relationship with the US is shaking up financial markets, said Matt Gerken, a geopolitical strategist at BCA Research.

Many hedge funds viewed China as a big opportunity in the wake of Donald Trump's presidency, since the US had changed its tactics in dealing with China. Many hedge funds, he said, believed that the US was going to be more hawkish on China.

"What they saw was that the US was going to be continuing to trade with China, and probably developing a more surgical policy, which meant that you got rid of this headline risk of sweeping broad-based tariffs that could destabilize the global economy."

However, hedge funds underestimated the risk in the country, said Gerken. 

"The realization now that is dawning on many investors including hedge funds is that the domestic politics of China are an inherent source of increasing risk today," Gerken added. "It wasn't driven by the US putting pressure on China. In fact, things are taking place in China that are making it more risky to invest in there." 

Activist short-seller Carson Block and founder of Muddy Waters Research believes President Xi Jinping is steps ahead and knows that the US will eventually end up delisting companies in China in a few years.

Chinese regulators this week said Chinese companies will be allowed to go public in the US as long as they meet listing requirements. On Friday, the Securities and Exchange Commission announced it will require even more disclosures from Chinese companies looking to register securities. Further, Chair Gary Gensler has asked his staff to "engage in targeted additional reviews of filings for companies with significant China-based operations." 

"By the time HFCAA kicks in and authorizes or mandates the delisting, there certainly won't be any Chinese companies left to delist," Block recently told Insider. "I think that's what Xi is trying to accomplish. He's warning companies that IPOs in the US are over, and you better start thinking about how you delist from the US." 

Bradley Saacks contributed to reporting on this story.

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Hedge funds, long considered the world's best public market investors, have been losing their edge. Quants are squeezing out inefficiencies while funds struggle to justify their cost.

In turn, these managers have turned to the murkier private markets to boost returns. Like in the public markets, strategies run the gambit. 

At biotech specialist Perceptive Advisors, Chris Garabedian looks for startups at the beginning of their lifespans with limited track records. D.E. Shaw has put money to work overseas, including in China. Point72's Hyperscale fund uses artificial intelligence to supercharge its portfolio companies' operations. Two Sigma uses its data science expertise to predict winners in nascent industries.

"We see tremendous technological innovation and value creation in private markets, and capital providers like us can play an important role in that equation," said Edwin Jager, head of fundamental equities, for D.E. Shaw in an interview with Insider. 

Insider went deep with dealmakers at D.E. Shaw, Perceptive, Two Sigma, and Point72 to understand how these massive funds, which to date have raised billions combined to deploy in the private markets, use their expertise in a different space. 

 Same playbook, different game

Many funds investing across both public and private markets stick to what they know. Point72 and Two Sigma are no different. 

"Private investing is a deeply fundamental sport," said Dan Gwak, managing partner of Point72 private investments, which includes the firm's venture unit and AI-driven private equity fund. A focus on sector expertise and deep research "is just a part of Point72's DNA."

Research and due diligence might be even more critical for early-stage private companies that are selling dreams, not products. Point72's venture business has written checks as small as $250,000 and mainly focuses on seed and Series A rounds. Investments include fintech Acorns, which they have since exited, and startup defense contractor Shield AI. 

The firm's Hyperscale business is unique for the firm, given its focus on artificial intelligence. So far, the private equity fund has only made two investments, and focuses on industries where there's a lot of repeatable tasks done on computers by humans; the goal is that Point72's AI can automate those tasks away so employees can be more productive. 

An example of Hyperscale investments include ActZero, which responds to cybersecurity threats from clients.

Two Sigma's known for its quant prowess and rapid public market trades. But its four lines of business focused on private markets — venture, private capital, real estate, and impact — showcase another area of expertise.

Its venture arm leverages the firm's knowledge of artificial intelligence and its broader team of 1,700 people to source deals.

Founding partner Colin Beirne told Insider that Two Sigma uses its technical talent to help its companies operate. It once hosted a competition for its own engineers to help its portfolio company, wearables startup Whoop, develop a new algorithm. 

"It's a more fertile ground than ever before to apply a systematic data science and technology-driven lens to private markets investing, which historically has not been impacted by that kind of thinking before," Beirne said.

Going across the company timeline and across the world

For Perceptive Advisors, a partnership with start-up incubator Xontogeny revealed promising young companies.

Garabedian, who founded Xontogeny and also is the portfolio manager for Perceptive Advisors' two venture funds, told Insider there are seven companies in Xontogeny's incubator, giving him an inside look at potential venture investments.   

Because of his dual role, Garabedian said that "even if I'm considering a simple seed investment, a $1 million or $2 million investment, I'm bringing it through the full due diligence process," because it fast-tracks a potential follow-up from one of the venture funds down the road.

"If all goes well, I've already kind of pre-cleared the next investment," he said. 

Garabedian leans on Perceptive's team for its expertise in public biotech and healthcare companies.

"Unlike pure play venture funds, they're looking every week at public companies, crossover companies," said Garabedian. "Perceptive is seeing everything."

Jager, of D.E. Shaw, runs the $55 billion asset manager's fundamental equities strategy, which employs tactics from activist campaigns to event-driven bets. 

Private investments are part of that puzzle, and DE Shaw's global reach introduces other options beyond Silicon Valley's latest. The firm was one of several to get a charter from the Chinese government to operate in the country, and Jager told Insider that the firm's team there brings it potential investments.

The firm also uses its data science team to find opportunities and run due diligence on private companies in restrictive regions, Jager said. Right now, the firm looks at Series C to pre-IPO rounds.

Privates have "been a focus for our team over the last several years, and we expect it to remain so," he said.

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Point72 Asset Management has hired a star credit trader from JPMorgan Chase as a new portfolio manager.

Leon Hagouel, an executive director in JPMorgan's fixed-income trading division, has resigned to join the $22 billion hedge fund run by billionaire Steve Cohen, sources familiar with the matter told Insider. 

He's set to start at Point72 in October as a macro portfolio manager, the sources said. 

Representatives for Point72 and JPMorgan declined to comment.

Hagouel joined JPMorgan in 2006, according to FINRA records, after completing his master's in financial engineering at the University of California at Berkeley. 

Hagouel has been a top performer at JPMorgan, where specialized in trading credit-default swaps, junk bonds, and distressed credit, sources told Insider.

Credit was a leading revenue producer in a record year for sell-side trading desks in 2020, and a war for top talent has erupted in the aftermath. While much of the hiring has been between banks, buy-side investors have lured away some marquee performers as well. 

John Cortese, previously US cohead of credit at Barclays and one of the Street's top junk-bond traders, left to run global credit trading at Apollo after Zachariah Barratt decamped for Citadel; Earl Hunt, a Goldman Sachs partner who specialized in leveraged finance sales, also joined Apollo.

Earlier this year, star index credit trader Shawn Joshi left Morgan Stanley for hedge fund Compass Rose Asset Management. 

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Gabe Plotkin's chipping away.

After booking losses of 46% in the first half of the year, Plotkin's Melvin Capital has started the second half with a solid month of returns. Sources told Insider the $11 billion hedge fund manager returned 5.4% last month despite the China-related tremors in the market. From the beginning of February through the end of last month, the fund is up 25%, sources told Insider.

Yet Melvin is down 43.2% for the year due to its massive January losses.53% The firm declined to comment. The S&P 500 was up 2.3% in July, and is up 17% year to date. 

In January, the fund had big short positions against several stocks, most notably video-game retailer GameStop, which was a favorite of popular Reddit channel r/WallStreetBets. Retail traders piled into the stocks, dinging names like D1 Capital and Maplelane Capital in the process.

Melvin's losses became severe enough that Citadel and Point72, run by Plotkin's former boss Steve Cohen, pumped a combined $2.75 billion in exchange for a cut of future profits, though Plotkin has pushed back on media reports calling it a bail-out. The Reddit-fueled trading frenzy led to a Congressional hearing on retail trading, a new focus on retail trading platform Robinhood's revenue streams, and several funds altering their shorting practices, including Melvin and Dan Sundheim's D1. 

Plotkin, a minority of the NBA's Charlotte Hornets, began his climb out of the January losses with a big February, making 22%, but fell again in March, losing 7%. As of the end of the first quarter, the firm's biggest holdings were Expedia, Mastercard, Visa, and Google, regulatory filings show. It had sold out its Alibaba and JD.com stakes that quarter.

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The alternative data business, for as much as the industry has boomed in recent years, is still a hard nut to crack.

Data vendors need a product with a history and clear money-making ability, as well as a connected sales team to get it in front of the right hedge funds and companies. This data is pulled from thousands of non-traditional sources, like email receipts and cell-phone geolocation trackers, and has become a requirement for many hedge funds looking for an edge. But, with how fast the markets move, one style of data can be the go-to source one day, and rejected the next. 

So, when hedge funds try to get around paying for data, vendors are understandably frustrated. It's gotten to the point that five major vendors, including web-scraping data-seller Thinknum, have maintained an informal blacklist of funds not to work with for two years now. 

Justin Zhen, the cofounder of Thinknum, told Insider that the list currently has 12 funds on it, including "some big names," but declined to disclose which funds are on it or the other vendors that contribute to the list. The way a manager ends up on the list is simple: They want what a vendor has, but don't want to pay for it.

How to get blacklisted

Theft is a main way funds get in hot water with data vendors. Some managers will try and pry from the sales team how other funds are using the data, or rip off the methodology the vendor uses to create its datasets internally.

"For us, we see a lot of firms try to get ideas on our system of crawling," said Zhen, whose web-scraping firm capitalized on the Reddit-induced market madness earlier this year by creating WallStreetBets-focused datasets. The firm is constantly taking snapshots of different webpages to notice changes the instant they happen.

Then there are funds that just take sample data and don't delete it from their systems, which nearly all vendors require to get a sample.

"Usually if a firm will do this to one vendor, they'll do it to another," Zhen said. It hasn't risen to the level of legal action ever for Thinknum, but it's come close, he said, including some harsh letters sent out.

Other ways to end up on the blacklist are less nefarious, but still hard for vendors to deal with. One main reason funds can get on vendors' bad side is by constantly trialing data but never buying it.

"It becomes a drain on resources," Zhen said.

A lot of funds in this situation are often figuring out how exactly they'll use alternative data in their firm, and are trying different techniques. Thinknum and others have patience, but it's not unlimited.

"It's not always malicious. If a firm doesn't buy, that's ok. They don't go on the blacklist. But if you sample five times in two years, that's not ok," he said. 

Still a trust-based business

Once a fund is on the list, it's not there forever. Often, the blacklist is related to an individual at certain hedge funds, and once that person leaves for another job, dialogues can open back up, Zhen said. For excessive samplers, coming back with a ready-made offer can be enough to bump you off the list.

Lorn Davis, VP of corporate and product strategy at Facteus, which is not one of the vendors that use the blacklist, said the expectation is that large hedge funds will try and source their own data to avoid paying companies like his. At website-traffic-tracking vendor SimilarWeb, which also isn't among the five vendors that share a blacklist, the firm has noticed funds trying to find the same signal its data provides through cheaper datasets.

"You've got to convince the user of the long-term value, that it's not just a short-term buy," said Ed Lavery, director of investor intelligence for the newly public company.

And protecting your edge in sales conversations is critical, Davis said. 

"It's my job to make sure I don't divulge proprietary information," he said. Facteus compiles transaction data from scores of sources, but doesn't reveal to potential clients where it gets its information, for example. 

"This is the game, you have to have a level of trust," Davis said. "They're going to test it, you cannot lie about data."

For funds that end up on a blacklist, uncovering the cause is critical, said Chris Petrescu, a former data executive at ExodusPoint who now runs his own consultancy. 

For funds that end up on a blacklist, uncovering the cause is critical, said Chris Petrescu, a former data executive at ExodusPoint who now runs his own consultancy. 

"It could be trivial, like adding a clause in a contract, it might relate to someone that is no longer at the fund, or it could be ego-related," he said. In the meantime though, managers find an alternative as fast as possible because, in the data business, "time is money." 

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The cheery sentiment surrounding hedge funds' first half of the year — which places like Hedge Fund Research have trumpeted as the best start in decades — does not apply to all managers. 

There are managers who have been slammed this year by massive market events, such as Gabe Plotkin's Melvin Capital, which was caught up in a retail trading-induced short squeeze in January and is still digging out of the hole, or macro shop Alphadyne Asset Management, which lost $1.5 billion in July after a bet on rising interest rates went awry.

But other top funds have been quiet, protecting their massive books during rocky markets and geopolitical skirmishes.

A top performer from 2020, billionaire Philippe Laffont's $48 billion Coatue, was up 1.7% in July and has made 7.6% for the year, sources tell Insider. 

$65 billion Tiger Global, according to Bloomberg, lost 0.8% in July, avoiding what could have been serious losses given the fund's exposure to China. Billionaire Chase Coleman's manager is up 4.4% on the year through July, after a strong June.

The S&P 500, by comparison, was up 2.3% last month and finished July up 17% for the year.

One Tiger Cub who has stood out is Maverick, run by billionaire Lee Ainslie. While the $9 billion firm lost long-time executive Andrew Warford earlier this year, it has had a banner year, adding another 2% in July. The firm is up 39.6% for the year, sources tell Insider.

At a different tech-focused manager, returns haven't come as easily. Alex Sacerdote's $13 billion Whale Rock lost 3.4% in July, bringing its year-to-date performance to 7.8%, a source tells Insider. The firm, which started investing in private opportunities last April, has put $800 million into start-ups in a little more than year's time.

Biotech specialist Perceptive Advisors, run by billionaire Joseph Edelman, has had a tough run this year, as the sector as a whole has struggled. Early estimates of last month's returns have the firm's $2.6 billion flagship fund down 26.3% for the year after falling 6.5% last month.

Younger managers such as Ben Jacobs' Anomaly and Jack Woodruff's Candlestick Capital have had mediocre years so far. Jacobs, the former chief investment officer at Viking Global, is down 2.7% for the year after making roughly 0.2% in July, sources tell Insider. The $1.7 billion manager began trading outside capital at the start of the fourth quarter last year and made more than 17% in the quarter.

Meanwhile, former Citadel portfolio manager Woodruff is up just under 2% for the year following gains of 1.2% in July, sources tell Insider.

Another recent addition to the extended Tiger family has been able to build upon its debut success last year. Untitled Investments, founded by former Tiger Global partner Neeraj Chandra, was up 2.5% last month, bringing its 2021 returns to 9.7%, a source familiar told Insider.

The fund, which manages more than $500 million, launched in April of 2020 and has made 76.6% since inception. 

Firms mentioned either declined to comment or did not immediately respond to requests for comment.

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UK-based Gladstone Capital has boosted its leadership team with a new COO and a new sector head of technology, a source familiar with the matter told Insider.

The global long short equity manager tapped Sumant Wahi as partner and sector head of technology. London-based Wahi joined the firm this month after serving as a portfolio manager for Fidelity International's Future Connectivity fund, a global technology, media, and telecoms mutual fund, and an analyst responsible for US software and internet investments for over six years. 

Wahi's hire comes after Gladstone, which manages $2.6 billion in assets, appointed James Coltman as partner and chief operating officer in June. Coltman was previously the chief financial officer at fintech firm Fnality International and held senior roles at Arrowgrass Capital Partners and Deutsche Bank, the source said. 

Further, Gladstone has hired Nabil Bouras as an analyst covering insurance companies, pushing the firm's total headcount to 17 people. 

The source told Insider that Gladstone is continuing to add talent to the firm, but did not specify which roles they are looking to fill. 

The manager, which focuses on global large-cap stocks in the TMT, consumer, and financial sectors has returned 5% year to date. The average hedge fund is up 9.5% through the first seven months of 2021. Still, Gladstone lost 10% during the first quarter of this year and lost 6% in January when markets were rocked by the Gamestop short squeeze, the Financial Times reported. 

Gladstone was launched in 2005 by CIO George Michelakis formerly of Lansdowne Partners.

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Coinbase, the world's largest cryptocurrency exchange, is looking to focus more on institutional clients, CFO Alesia Haas said on Wednesday.

"The way that we look at it is where the money is in the world," Haas told CNBC. "A lot of that money sits in institutional hands, whether that is in pensions or asset managers. So I think we'll shift into more institutional money as we go forward."

Haas also laid out what institutional firms generally look for when seeking their services.

The first step is usually for cryptocurrency custody, a service that Coinbase provides institutional firms so they can have a safe and secure way to store their digital assets, said Haas.

"They really appreciate our history of investing in security that we have not had a loss due to cyberattacks on our platforms since our inception," she told CNBC.

From there, Haas said it moves into trading, data services, and borrow-lend products, in that order.

"We're really building deep roots with a lot of our institutional clients across their investing needs in the crypto economy," she added. 

Among its roster of clients are Elon Musk's SpaceX and Tesla, as well as PNC Bank, Third Point, and WisdomTree, CEO Brian Armstrong revealed on Tuesday during the earnings call. Around 10% of the top 100 largest hedge funds by AUM have also onboarded the company's institutional product, he added.

The company on Tuesday postedsecond-quarter earnings that crushed analyst expectations, boosted by a volatility-spurred jump in trading volumes. The chart below shows pronounced quarter-over-quarter growth in both retail and institutional activity.

Retail investors, which pay more fees compared to institutional traders, comprised almost 95% of Coinbase's transaction revenue in the quarter.

Coinbase's stock rose to as much as 9% to $294 on Wednesday.

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Some of the biggest hedge funds are diving into cryptocurrencies, accelerating the battle for crypto talent among investment managers. 

In recent months, hedge funds have built out their presence in cryptocurrency and expanded their reach. Point72 Asset Management is looking for a head of cryptocurrencies, TheStreetreported in June. Large firms like Third Point, Tudor Investment, and Brevan Howard are investing in crypto, while Millennium Management has exposure to crypto through exchange-traded funds and trusts. London-based Marshall Wace is also planning to jump into crypto by investing in areas like blockchain technology, payments systems for digital currencies, and stablecoins, the Financial Times reported in July. 

Hedge funds are following in the footsteps of banks and asset managers that have bolstered their crypto capabilities over the past year on the back of client demand.

A fifth of hedge funds are investing in digital assets, and 86% of those plan to pour more capital into the asset class by the end of the year, according to a recent report from the Alternative Investment Management Association, PwC, and Elwood Asset Management. The recruitment firm Selby Jennings said 46% of all the hedge funds it is working with are "exploring adding digital asset exposure - either through launching internal desks or allocating capital externally," in a recent report. 

Where are hedge funds looking? 

The demand for crypto talent has accelerated in the investment-management industry, triggering a slew of searches for the recruitment firm Russell Reynolds Associates. 

More recently, managers have been seeking senior product leaders to help build out their cryptocurrency product lineups as well as an influx of technology-related roles. Chris Davis, who co-leads Russell Reynolds' global fintech practice, recently helped fill a blockchain-technology role for a large asset-management firm. 

Managers tend to put emphasis on domain expertise in blockchain or cryptocurrency. Unlike when hedge funds might poach from a rival for an investment-management role, when it comes to digital assets they're generally looking to fintechs and exchanges instead. 

"If it's a product role or a tech role, they are certainly looking at smaller fintechs or blockchain-enabled exchanges versus large asset managers," Davis said. 

Further, demand has risen sharply for people with experience with the Securities and Exchange Commission and financial regulators, said Anthony Halvatzis, the founder and CEO of London-based recruitment firm Blockchain 121.

Halvatzis has noticed an exchange of talent between traditional finance and the cryptocurrency industry. Crypto-related funds typically lure executives from traditional markets with experience in fund formation, operational due diligence, and compliance, he said. 

Meanwhile, traditional funds are bringing in crypto natives, Halvatzis said, "to help them navigate the crypto world, which is unlike anything the traditional funds have ever seen."

Technical knowledge over crypto experience 

For some hedge funds hunting for talent, experience in crypto or blockchain is not entirely necessary. 

Cambrian Asset Management, a $150 million quant fund specializing in digital assets, has had the best success looking outside of hedge funds for data and traditional software roles. 

"We're trying to find people, who may be in scientific research or technology development roles but have the potential and qualities that we're looking for so that we can bring them on board and train them," said Martin Green, co-chief investment officer and CEO at Cambrian. 

The firm, which has a blockchain fund and a crypto-trading fund, wants to hire more data engineers who have strong technical backgrounds and are problem solvers, said Daniel Tyreus, who heads engineering for Cambrian. 

"We don't need to hire specialists in crypto," he said. "We don't need to hire specialists with a specific degree or a particular background or knowledge, since crypto is an emerging field."

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Tiger Legatus, a $200 million Tiger Grandcub run by former Viking Global portfolio manager Jesse Ro, bet big on DiDi Global, which has immediately run into trouble since its $4.4 billion IPO. 

DiDi, the Chinese ride-sharing app that went public at the end of June, was one of several China-based companies hit as the Chinese government signaled an impending crackdown on internet and tech companies. The Uber competitor is a favorite among hedge funds, with many — including Tiger Legatus — investing before the public offering. 

But Tiger Legatus' stake in DiDi made up more than 50% of the firm's public equities portfolio at the end of the second quarter, and the firm could be looking at serious losses thanks to the sell-off in July. 

The firm, seeded by Tiger Management founder Julian Robertson, runs a concentrated portfolio of roughly a dozen names. 

The next top holdings for the firm were a $21 million bet on Expedia and a $12 million on Patria Investments, a Latin America-focused investment manager. To compare, the firm's bet on DiDi was worth over $100 million at the end of the second quarter.

DiDi's stock has fallen dramatically since July's start. After jumping up to $16.40 a share on July 1, the stock fell to $8 on July 23. It closed at $8 a share on Monday.

Tiger Legatus, which was launched in 2009, was such a big believer in DiDi before the IPO that it ran a special-purpose vehicle — which hedge fund managers like Bill Ackman occasionally raise to pile more money into their favorite ideas — with just a single holding: DiDi.

Tiger Legatus did not respond to requests for comment. 

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Chinese stocks continued to tumble this week on new data showing the slowdown from COVID-19 was worse than expected in July. Shares of Chinese companies, mostly in tech, began plunging in mid-July as local regulators threatened a crackdown on US-listed Chinese companies. 

Some hedge funds who went into the second quarter with large positions in Chinese companies were left holding the bag while others sold off their stakes at a prescient moment. New regulatory filings revealing positions as of the end of the second quarter show how intertwined some firms have become with massive Chinese companies. It's unclear if the funds listed held these positions through the sell-off, or still hold them today.

Insider rounded up possible winners and losers of the sell-off, with firms like D1 Capital and Coatue doubling down on their bets before the market took a dive while China bulls like Tiger Global Management and Sculptor Capital trimmed their positions early and avoided serious damage.

Doubling down and buying in

D1 Capital, from billionaire Dan Sundheim, has already had to battle masses of retail traders piling into one of his short targets earlier this year. Now, he is dealing with the Chinese government eyeing one of his biggest positions as of the end of the second quarter: ecommerce giant JD.com. D1 increased its position by 25%, or to a stake worth $1.24 billion, compared to the first quarter of the year. 

The company's stock price has fallen more than 16% since the start of the third quarter, as of the end of trading Monday.

The firm, which has been one of the top-performing funds since launching in 2018, had a strong July though, a source familiar tells Insider. D1 was up 5.6% last month, bringing its year-to-date performance to 9.7%.

Big-time 2020 winners Coatue and Rokos Capital have been unable so far to match the returns they produced last year, and the dip in Chinese stocks has not helped. Rokos, the $15 billion London-based macro manager, added at least three Chinese companies to its public equities portfolio — JD.com, Alibaba, and DiDi Global — in the second quarter, investing a total of $140 million. 

Alibaba is down nearly 20% in the third quarter, while DiDi Global has fallen by more than 40% since its IPO in June.

Coatue meanwhile piled into JD.com to the tune of some 870,000 shares. At the end of the second quarter, those shares were worth $69.5 million. Currently, that many shares are worth just over $58 million.

Other firms that bought into Chinese companies prior to July include:

• Karl Kroeker and Mike Rockefeller's Woodline Capital, which doubled its stake in Chinese internet company Baidu. The company has fallen just under 30% in the third quarter.
• Billionaire Jamie Dinan's York Capital, which invested roughly $12 million in agriculture tech platform Pinduoduo last quarter. The company is down more than 35% this quarter.
• The family office of billionaire George Soros, which made a roughly $40 million investment into DiDi Global. 
• Dmitry Balyasny's eponymous firm, which runs its billions in assets across dozens of teams. The firm increased its bet on JD.com and bought into newly public company DiDi Global, while it decreased its small stakes in Alibaba and Tencent.

Trimming down

Chase Coleman's $65 billion Tiger Global is well-known for its big bets in China, and Bloomberg reported in July that it was still bullish on the country's prospects despite regulatory fears. But the manager trimmed its positions preemptively in at least one Chinese stock, shedding about 300,000 shares in Alibaba. The firm did however hold onto its stake in Pinduoduo, filings show.

The firm lost less than 1% last month, avoiding serious pain.

Sculptor Capital Management, which went into the first quarter with sizable bets on JD.com and Alibaba, managed to trim its positions in both before the stocks took a nosedive. During the second quarter, it sold off nearly 300,000 shares of JD.com, bringing its stake down to $197 million from $233 million at the end of the first quarter, and shed 200,000 shares of its Alibaba holdings to boot. 

The firm's flagship fund dropped 0.2% in July, but is up over 5% for the year, filings show. 

Gabe Plotkin's Melvin Capital Management avoided more pain this quarter after getting burned in the now-infamous GameStop short squeeze, during which it was down 53% in the month of January alone. The New York-based hedge fund sold out of its entire position in Alibaba this quarter after ending the first quarter with 900,000 shares. 

Other firms that sold off shares in Chinese companies prior to July include:

• Billionaire David Tepper's Appaloosa Capital Management, which cut its stake in Alibaba roughly in half, though it still has more than 1.1 million shares, worth some $260 million.
• Macro hedge fund Athanor Capital, founded by D.E. Shaw alum Parvinder Thiara, ditched its entire stake of 118,000 shares in JD.com in the second quarter.
• David Fiszel's Honeycomb Asset Management, backed by Dan Loeb and Steve Cohen, dumped its hefty stake in Alibaba, which used to comprise 6% of its public equities portfolio.

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Investors pay more than their fair share of attention to cycles in business, the economy, and markets — and their own behavior can be just as predictable.

Savita Subramanian, the head of US equity strategy and quantitative strategy at Bank of America Securities, says that one easy way to improve returns tomorrow is to look at what some long-only investors won't buy today — because almost inevitably, those stocks will have a moment in the sun.

"The strategy of buying the 10 most underweight stocks and selling the 10 most overweight stocks [by active funds] each year has generated an average of 5ppt to 18ppt of alpha per year, with the exception of 2017 and 2020," she wrote in a recent note to clients.

She suggests that the flow of investors' money out of actively-managed funds and into cheaper passive funds is causing this to happen. That flow has been one of the most important dynamics in investing over the last few years, and it's a pattern that will continue to occur. 

"We believe this should continue, as the main driver of the most crowded stocks' weakness - outflows from active fund into passive vehicles - is likely far from over," Subramanian said.

Many of those funds track major indexes like the S&P 500. When a stock is under-owned by hedge funds, those passive vehicles essentially drag its ownership back to the benchmark. Subramanian uses the positioning and activity of long-only (LO) hedge funds to get cues for the stocks where the trade is likely to work.

"In addition to the level of LO positioning, there is also an alpha signal in the change of LO positioning, where stocks with decreasing LO crowding risk have historically outperformed those stocks with increasing crowding risk," she said.

That is to say, if stocks that are under-crowded have more potential than those that are already popular, stocks that are actually losing favor among hedge funds have outperformed those that are getting more attention. Subramanian adds that comparing the stocks to a benchmark and evaluating their relative weight makes the signal work better.

"Based on the average rank of (1) three-month decrease in LO relative weight and (2) the level of HF net relative weight, stocks within the top quintile have outperformed the bottom quintile by 20% since September 2011," she wrote.

These are the stocks hedge where funds have the most exposure relative to the S&P 500. That's where Subramanian recommends selling.

• Baker Hughes (BKR)
• Chipotle Mexican Grill (CMG)
• EOG Resources (EOG)
• Carrier Global (CARR)
• Netflix (NFLX)
• NetApp (NTAP)
• Caesars Entertainment (CZR)
• Royal Caribbean Group (RCL)
• LyondellBassell Industries (LYB)
• Cigna (CI)

And these are the stocks with the lowest levels of relative exposure from long-only funds. Stocks in that position have outperformed in the recent past.

• Under Armour (Class C) (UA)
• People's United Financial (PBCT)
• Alliant Energy (LNT)
• Leggett & Platt (LEG)
• Amcor (AMCR)
• Unum Group (UNM)
• Consolidated Edison (ED)
• Rollins (ROL)
• Assurant (AIZ)
• NiSource (NI)

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Some of BlackRock's hedge funds have seen stronger performance so far in 2021 than earlier this year, but four of its five strategies are still underperforming the average fund. 

The world's largest asset manager's $601 million Emerging Companies hedge fund, led by Dan Whitestone, grew 11.5% year to date as of Aug. 6, according to HSBC's latest Hedge Weekly report. It was the only fund in BlackRock's lineup to beat the average hedge fund, which returned 10% through July, according to Hedge Fund Research.

BlackRock's flagship hedge fund, the $1.67 billion Obsidian fund, grew 8.2% year to date as of Aug. 6. The Stuart Spodek-led fund invests in rates, mortgages, and corporate credit across fixed-income markets. The fund was slammed in early 2020, falling 20% as of March 20, 2020. 

Its $230 million UK Equity hedge fund, led by Nigel Ridge, returned 2.4% for the year through Aug. 6, the $1.67 billion Fixed Income Global Alpha fund returned 4.5% over the last seven months to the end of July, while its $903 million 32 Capital Master fund gained 6.3% over the same period, HSBC's data shows. 

BlackRock isn't the only large asset manager with hedge funds that haven't beaten the average hedge fund's performance. 

For its part, Pimco's $5.8 billion Tactical Opportunities Fund saw a 9.4% increase year to date at the end of July. The fund raised hundreds of millions in 2020 as it told investors that it was one of the best investing environments in decades. The fund is led by Dan Ivascyn, Russell Gannaway, and Sharad Bansal. 

Its $2.7 billion Global Credit Opportunity Fund Series 1 returned 5.7% for the year through the end of June. 

However, Pimco's $400 million Absolute Return Strategy IV Offshore Fund II dipped 0.76% over the same period. 

BlackRock and Pimco declined to comment on performance. 

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It wasn't that long ago that investments into private companies were shunned by hedge funds.

The financial crisis left hedge funds with illiquid assets scrambling, and "people hated the word side-pocket" afterward, a reference to the quarantined pools of money managers would use to make concentrated bets, said David Fiszel, founder of Honeycomb Asset Management.

But, after a decade of low-interest rates and massive companies staying private longer, hedge funds have pumped billions into the private markets and that number is only going to grow. Managers like Alex Sacerdote's Whale Rock and Fiszel's Honeycomb have new crossover funds in the works, while places like Lone Pine have increased their allocation to start-ups.

With valuations skyrocketing, partially thanks to this rush of new capital, privates seem like the place to be for any ambitious hedge fund manager. But the backers of these hedge funds can still take some convincing that these deals are worth the risk.

One manager, who asked for anonymity when talking about discussions with clients of his roughly $1 billion fund, told Insider that while some investors were really supportive, others had "their minds blown" by the private deals his firm did this year. 

"The idea that a public stock isn't that different from a private stock, I think that's really hard for people to understand," he said.  

To be sure, investors aren't rushing to redeem because of new private exposures. Major institutions are being forced into assets they would not have traditionally considered due to low interest rates. Bonds that could be once be relied upon to deliver returns are coming up short. 

"For large institutional investors, there's a growing awareness of opportunities in things that don't fit neatly into their asset class buckets," said Samantha Rosenstock, head of investment research at Man FRM, the $13 billion fund-of-funds run by London-based Man Group. 

Pensions and sovereign wealth funds make up a large chunk of Man FRM's client base, Rosenstock said, and these types of investors have boundaries on what their managers can invest in. Many pensions, for example, have sleeves of opportunistic investments that can include more illiquid holdings but had to update their regulations and bylaws to incorporate private credit into their fixed-income portfolios years ago.

"They want diversifying strategies, but they also don't want to muddy their current allocation," said Rosenstock, who previously was head of alternative investments at New Jersey's state pension. A manager who primarily invests in public companies might fit in a pension's equity bucket, but when that fund begins making private bets, it might have to be moved into a different section of the portfolio.

Growing secondary markets are easing liquidity concerns

Craig Bergstrom, the chief investment officer of alternative investment manager Corbin Capital, said his firm became comfortable with some of its managers investing in privates because of the discipline they saw the manager exercise in the public markets. 

Corbin's investors are concerned about liquidity, but not necessarily on the asset level, he said. 

From Fiszel's vantage point, private companies aren't something thorough stock-pickers can avoid. 

"Today, the investment landscape is so much broader than it ever was," said Fiszel, who is invested in private companies like Bombas and Klarna.  

And the liquidity worry for allocators should lessen as the secondary market continues its growth. A survey of 400 LPs by fund administrator SEI and research firms Preqin and ANZU found that half of the participants planned to either buy or sell private stakes in the secondary market this year, compared to 38% in 2015. 

An active secondary market for stakes gives LPs an easier out of an illiquid position, Jay Cipriano a managing director of SEI's investment manager services division, said.

"Who is a pure hedge fund anymore?" he said.

"Everyone is doing a little bit of everything these days."

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• US hedge funds have been burned by China's regulatory crackdown in recent months, according to Goldman Sachs.
• The bank found that Chinese stocks were the most popular ever among hedge funds at the start of the third quarter.
• The average China ADR has declined by more than 50% since February, according to Goldman.
• Sign up here for our daily newsletter, 10 Things Before the Opening Bell.

US hedge funds seem to have been caught off-guard by China's regulatory crackdown and the ensuing sell-off in Chinese stocks like Alibaba, Tencent, and JD.com.

According to a Thursday note from Goldman Sachs, recent underperformance by US hedge funds has in part been driven by their exposure to Chinese stocks.

"One third of hedge funds in our analysis held a China ADR in their long portfolio at the start of 3Q, contributing to the recent headwinds against hedge fund returns," Goldman explained. The bank analysed 813 hedge funds with nearly $3 trillion in gross equity positions at the start of July.

Chinese stocks have seen accelerating declines as companies across all sectors face increased regulatory scrutiny from Beijing. From tech giants like Alibaba and Tencent, to small education tutoring companies based in China, the stock losses have been large. 

The regulatory crackdown started late last year after Alibaba's Jack Ma made critical comments against several institutions in China, which ultimately led to the withdrawal of Ant Group's highly anticipated IPO. But the losses in Chinese stock prices didn't accelerate until this year. The average China ADR has decline by more than 50% since February, according to Goldman.

Chinese stocks most popular with hedge funds include Alibaba, which ranked seven, as well as JD.com, Baidu, Didi, and Bilibili. 

"At the start of the third quarter, 33% of hedge funds in our sample held long exposure to China ADRs, suggesting funds were generally unprepared for the recent regulatory tightening," Goldman Sachs said.

US hedge funds aren't the only ones losing money on Chinese stocks. China's richest tech titans have seen $87 billion of personal wealth destroyed amid the government crackdown on different industries. 

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Honeycomb Asset Management is only five years old, but founder David Fiszel has been thinking about it for at least 20.

It's Fiszel's second spin at running his own fund – he launched the short-lived Rhombus Capital Management in 2004, when hedge funds could be "two guys and a Bloomberg," and closed it three years later. He believes Honeycomb is the product of a more measured approach to firm-building, and the fund is coming off the best year in its history. 

"I think I had some maturing to do, and running a business is a lot different than just stock-picking," he said in an interview with Insider. The former Point72 and Omega Advisors money manager laid out how he's reacting to the current investment landscape and market phenomena with the training from his old bosses as his guide.

"I got my undergraduate degree in stock-picking from Lee Cooperman and got my Ph.D. in risk management from Steve Cohen," he said. 

His experience paid off last year in a big way. Honeycomb returned 58%, besting the average fund return of 11.6% —the big year helped push firmwide assets to roughly $1.5 billion. Through the first half of this year, the fund is up more than 7% thanks to a 5.1% gain in June, though it trails the average fund, which was up 10%, according to Hedge Fund Research.

Honeycomb declined to comment on performance.

Peloton, Bombas, and voice-recognition software

While a majority of Honeycomb's assets are invested in the public markets, Fiszel has been a player in the private markets going back to his time at Point72, where he invested in Twitter and Palantir before they went public.

Honeycomb now has stakes in sock-maker Bombas, e-commerce company Farfetch, and payments start-up Klarna, which raised a $639 million round in June led by Softbank that Honeycomb has a part of. 

Fiszel doesn't see that much difference between investing in large private companies and public companies. For instance, he considers himself "the same analyst for Instacart and DoorDash." 

"The namesake of our firm is natural and organic growth," he said. "We like investing behind trends."

And while the firm sells out of positions once they hit their price target, they will hold onto their stakes after a company IPOs. Peloton is now a position in their public portfolio, but Honeycomb originally invested when the workout equipment-maker was a private company.

Another trend the company is following is the explosion in buy-now-pay-later payment options. Fiszel believes there is a "secular change" pushing people away from credit cards to companies like Klarna and Afterpay, both of which are in Honeycomb's portfolio.

He's also excited about voice-recognition software, telling Insider that the days of telling your car to "drive to Grandma's" isn't that far away.

'Process over outcome'

Determining how much a company is worth shouldn't be so difficult thanks to the countless tools and datasets top investors have at their fingertips, but the retail trading phenomenon has tripped up some of the best money managers in the game.

If the Reddit crowd were to pile into one of his holdings, Fiszel said the team would first determine if the retail traders are seeing something his team missed. But if their original price target still makes sense, they'd sell, even if day traders push the stock even higher.

"If nothing's changed, we have to stay disciplined. Process over outcome is what we focus on," he said. "If we won because the Reddit crowd took a stock up to $100, I don't know if I can do that every time." 

Neglecting your own rules is when you end up relying on luck, not skill, he added.

"It's when you try to copy someone else, and try to do something that you think you should be doing but don't really know what you're doing, that's when you run into trouble," he said.

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