Cadian Capital Management in July added 7.2 percent in its domestic fund and 6.8 percent gain in its offshore version.
Both funds are up between 43 percent and 44 percent for the year, ranking them among the top performing hedge funds, according to shareholder reports seen by Institutional Investor.
The funds were up about 33 percent in the second quarter alone thanks to double-digit gains in April and May, the reports said.
Cadian also posted annual gains ranging between 18 percent and 21 percent in each of the three previous years.
Cadian declined to comment.
The technology, media, and telecom-focused firm, headed by Perry Capital alum Eric Bannasch calls itself a fundamental, bottom-up firm, with a focus on technology, media, telecommunications, healthcare, industrials, retail, consumer, and other related sectors, according to client communications. “The strategy seeks to maintain what is believed to be a conservative net beta exposure,” the documents stress.
In fact, Cadian said its net exposure during the second quarter ranged from a high of 47 percent to a low of 21 percent. “This variance was greater than normal, as we continued to reposition the book in response to new opportunities and dramatic swings in single stock valuations,” it explained in its second quarter letter, viewed by II.
Despite the stock market’s extreme volatility, Cadian has managed to make money on both the long and short sides this year.
The long book kicked in 41.4 percent to gross gains in the first half of the year while shorts added another 3.3 percent, according to the second-quarter letter.
Cadian covered several short positions early in the second quarter that it said had hit its price targets. It then rebuilt the short book in May and June, noting “rebound euphoria and momentum crowding have created good opportunities to increase or initiate short positions.”
“The spectacular rise in the markets, against a backdrop of economic malaise, record unemployment, and failed Covid-19 management in the United States has been staggering,” Cadian added.
In the second quarter, its top contributors were all longs in consumer internet, e-commerce, and cyber-security.
The firm’s top five winners for the first half of the year were crafts marketplace Etsy and a stub security of IAC, followed by online furniture seller Wayfair, online video game company Zynga and music streaming platform Spotify Technology.
The biggest loser was a long position in online travel giant Booking Holdings.
Cadian said it reduced its exposure in several key long positions in consumer internet and e-commerce stocks throughout the quarter “given the significant stock performance and valuation re-rating.”
It also stressed that the June 30 spin-off of Match from IAC “marked an important catalyst for the largest investment in the funds.”
Looking ahead, Cadian said it continues to see “attractive upside” in several pre-Covid-19 investments “that are positioned to capitalize on long duration secular shifts that were accelerated by the pandemic.”
In addition, it initiated and increased exposure to “new ideas with temporary short-term impairment but highly compelling medium and long-term value.”
The letter singled out Spotify, which Cadian initially invested in back in April 2018 and in late 2018 “meaningfully” boosted its position. “We have long believed in Spotify’s ability to create a differentiated and superior consumer product in streaming music, a corner of media that was largely under-invested in by incumbents,” it told clients. “Over the last 12 to 18 months, the company’s aggressive investments in podcasting further extended its product capabilities while also providing an avenue for increased operating leverage.”
Cadian also expressed excitement about cybersecurity stocks. While companies like Zoom and Amazon were obvious beneficiaries of the stay-at-home era, “the radical decentralization of collaboration, comput[ing], and data exchange is also creating a lot of second order, longer dated changes in IT needs.”
And cybersecurity is one area of IT spending that it believes is “fundamentally upended by the pandemic.” Cadian is expecting larger and different investments in this area over the next three years.
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“At the highest level, security has moved quickly beyond protecting data centers, devices, and people within the physical location of offices,” the letter elaborated. “Processes, applications, data, and people are widely distributed across servers, networks, and devices that come and go from the corporates operations. Sensitive data now moves dynamically across dynamic boundaries at the same time that cyber criminals are better funded and more incentivized to take advantage of vulnerabilities.”
As a result, Cadian explained, companies are embracing the concept of “zero trust.” In other words, nothing inside or outside the network should be trusted. “In this world, each application and online process needs its own security protection and data and users must be monitored and tracked.”
Cadian highlighted two companies providing such services: Varonis and Radware.
“We continue to develop other long and short ideas within cybersecurity and believe it will remain a fertile ground for investment over the next two to five years,” it added.
