Call it Glade Brook Capital Partners’ incredible shrinking hedge fund business.
The New York firm founded by Paul Hudson reported in its second-quarter letter to clients that it now manages just $1 billion. This is down from $1.3 billion the firm managed the previous quarter and $1.439 billion at year-end.
All of the decline has taken place in the firm’s hedge fund business. According to the report, Glade Brook’s public equity vehicles now account for just $313 million of the $1 billion total, while private equity vehicles account for $730 million. This compares with $600 million in the hedge funds and $700 million in private funds the previous quarter and $684 million and $755 million at year-end, respectively.
At the end of 2013, $832 million of the firm’s $932 million was managed in its hedge funds. At the same time, Glade Brook has raised money for at least five new funds — which it calls private growth equity funds — since the beginning of 2014 alone.
Hudson is a so-called Tiger Grandcub because he previously worked for Tiger Cub Chris Shumway. Glade Brook’s asset total and mix changed in the past quarter mainly for two reasons.
For one thing, some investors earlier this year shifted their money from the firm’s hedge funds to the Glade Brook Private Opportunities Fund, a new private fund designed to invest in four to six “big global ideas.” The fund earlier invested in Uber Technologies, the ride-sharing service, and Snapchat, the messaging company.
The fund recently led the $100 million Series D financing of the Honest Co., the baby products e-commerce company founded by actress Jessica Alba. Earlier this summer Glade Brook led the $400 million financing of WeWork, which provides shared work space.
Meanwhile, Glade Brook has changed its strategy in its hedge funds from a diversified model to a concentrated portfolio of five to ten individual long ideas. This new look was reflected in the firm’s second-quarter 13F filing, which contained just seven different long stock positions. This compares with 14 in the previous quarter and 18 in the third quarter of 2014.
Because of the strategy change, Glade Brook gave investors the opportunity to redeem if they were not comfortable. Altogether the firm returned roughly $300 million in capital to people who redeemed as well as to those the firm felt were not a good fit for the new approach, according to an individual familiar with the changes.
The new strategy so far is working very well. The hedge funds — Glade Brook Global Domestic Fund and Glade Brook Global Offshore Fund — rose 2.2 percent in the second quarter, 4.6 percent in July and 4 percent in the first half of August. As a result, they are up 10.8 percent year to date. In 2014 the hedge funds lost 1.3 percent, but they gained 19.9 percent in 2013.
“During the second quarter, we benefited from our more concentrated, best-ideas portfolio construction,” Hudson tells investors in his second-quarter letter, which is also signed by research director Colin Kronewitter. They say long performance was mostly driven by gains in Expedia, Adobe Systems, Mondelez International and Facebook.
Glade Brook lost some money from its short positions. But Hudson tells clients his team is finding “exciting short opportunities” in what he calls “secularly challenged business models that face near and long-term headwinds.”
They include areas of retail that he stresses are “exposed to the structural shift to e-commerce, traditional media exposed to the shift in ad dollars and viewership to digital platforms, and traditional leisure and transportation companies facing increasing competition from peer-to-peer internet platforms” such as Airbnb and Uber.
“We are focused on structurally challenged businesses where our projection of future free cash flow is well below what is implied in the current share prices,” the firm elaborates on its short strategy.
Specifically, Hudson and Kronewitter say they are net short media and entertainment stocks, stressing they are short traditional media companies that are losing advertising and subscription dollars to digital companies such as Facebook.
“We believe and expect our contrarian theses will play out over the course of 2015 and 2016,” the firm tells clients.
