New Funds Hedge Their Bets on Tech

South of Market, San Francisco’s most start-up-heavy technology hub, is getting a namesake hedge fund firm. Gil Simon, CIO of San Francisco–based long-short equity firm Apex Capital and a leader of the firm’s technology, media and telecommunications strategy, is leaving to launch SoMa Equity Partners. The technology-focused firm is set to launch on May 1, according to a February letter to investors by Apex chief Sandy Colen, who will restructure Apex after Simon’s departure and serve as an adviser to SoMa.

Simon is one of several managers who have left their firms to launch new technology funds — taking teams of analysts with them — in recent months. In March, Chris Connor, former partner at Greenwich, Connecticut–based JAT Capital Management, launched Ardmore Global Investors, a global long-short equity firm with a focus on technology, communications and telecom stocks; it’s also based in Greenwich. The fund started trading with about $120 million and has a total of $200 million in committed capital.

Some analysts question whether now is the time to dedicate new funds to technology, a strategy that did fairly well last year but has hurt many funds so far in 2016. Major tech companies that are popular with hedge funds tanked this year: Online streaming service Netflix fell by 10 percent and Chinese e-commerce company JD.com dropped nearly 18 percent in the first quarter, causing losses for firms including several Tiger Cubs.

But many managers think the sector still has a lot of room for growth. GAM portfolio manager Amir Madden says the valuation discrepancies and volatility in the tech sector make it well suited to long-short equity funds, which can play both sides with their portfolios. And with generally muted expectations for global growth over the next year, technology is one place investors can still find a glimmer of excitement about returns. “It’s one of the sectors that can compound in excess of where other places are likely to be this year, which might drive investors to focus on the space a little bit more,” Madden says.

Some firms are going so far as to launch new special-purpose vehicles that look more like venture capital funds than hedge funds. Eric Wagner, chairman of fund-focused law firm Kleinberg, Kaplan, Wolff & Cohen’s corporate department, says, “People are turning over rocks they might not have turned over previously.”

Wagner has seen at least two firms use the special-purpose-vehicle approach to take advantage of the returns connected to many start-up tech investments. One is a traditional hedge fund firm that has recently launched a separate venture fund; another firm is keeping its venture strategy as a percentage of its in-house portfolio. Kleinberg partner Martin Sklar says he knows of another small firm that created its own angel investment vehicle, and that the lines separating venture capital, private equity and hedge fund strategies are blurring as managers of all stripes look for the next big thing. Says Sklar, “There will always be another Uber.”