After a dominant 2020, Rokos Capital is underperforming to start this year.

The $15 billion London-based macro manager is flat for the first six months of 2021, sources tell Insider, after posting gains of 44% last year. The firm, run by former Brevan Howard star Chris Rokos, raised $1 billion in April of last year as investors were clamoring for globally-focused investors. 

Macro funds were the initial stars of the hedge-fund world in the early months of the pandemic, as funds weathered the COVID-induced volatility well. Money flowed into big-name macro managers, such as Rokos and Brevan Howard, which closed its main fund in June after its assets have more than doubled since the start of last year to more than $7 billion. 

This year, however the average macro fund has underperformed the average hedge fund so far, according to Hedge Fund Research, 7.9% to 10% respectively. The data provider said the first half of 2021 has been one of the best on record since 1999 for hedge fund performance.

While Rokos hasn't had the 2020 encore he was hoping for yet, there have been some standout performers in the macro world. Castle Hook Partners, founded in 2016 with backing from billionaire Stanley Druckenmiller by a pair of Soros alums, is up roughly 40% over the last six months.

A regulatory filing from March states the firm runs more than $3.7 billion, but does not delineate how much of that, if any, is leveraged financing from banking partners.

Shawn Matthews's Hondius Capital Management is up more than 17% this year, thanks to bets on commodities and rates by the former Cantor Fitzgerald CEO's $200 million fund, Insider previously reported. 

Greg Coffey's Kirkoswald had a solid June — up roughly 5% — to put its half-year mark at roughly 7%, sources tell Insider. 

The funds mentioned either declined to comment or did not respond to requests for comment. 

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The Archegos debacle began rearing its head at the end of March, and within weeks, it became clear Credit Suisse was staring at more than $5 billion in losses and its prime brokerage business — the epicenter of the fiasco — was on the chopping block. 

The lions of Wall Street wasted little time before pouncing.

In quarterly earnings calls this week — less than three months since the Swiss bank announced it was gutting its hedge fund lending business by a third — JPMorgan and Goldman Sachs each reported records in their prime brokerage units.

JPMorgan credited its 13% uptick in equities revenues first and foremost to all-time highs in client balances in prime, while Goldman reaped $815 million in equities lending revenues as it hit record average balances in its prime business, according to earnings call transcripts compiled by Sentieo, a financial data provider. 

Goldman execs offered the most explicit insight into their prime brokerage boon. 

When Evercore analyst Glenn Schorr asked about their booming prime fortunes, as well as the Archegos fallout, Goldman CEO David Solomon confirmed they'd seen the opportunity to pick up new clients, as well as "to be more profound with our existing ones."

"You've obviously seen open expressions by other firms who are looking to reduce down their prime business. We're going the other way. We want to grow that business," CFO Stephen Scherr also said on the call, adding that "clients in motion around prime" were flocking to Goldman as well as others. 

Both executives underscored that the growth was judicious and "prudent" around pricing and term structure.

Indeed, other firms are hoovering up prime business, too. Prime brokerage professionals told Insider that an array of brokers accrued prime balances from Credit Suisse — though evidently not enough to hit record levels that warrant an earnings disclosure.

Moreover, the dust is still settling at the Swiss lender, and competitors will pick up more business over the next two months as Credit Suisse continues to unwind its book, sources said. 

Citigroup, a smaller prime player, acknowledged growth across its equities business when it reported results. But in a call with news media, CFO Mark Mason added more color, saying he expected growth in derivatives and prime finance to continue "as others retract from the space."

"I think we're well-positioned to gain there," he added. 

The pain at Credit Suisse — and Nomura, which is also retreating from its prime business amid a $2.9 billion Archegos hit — isn't the only groundswell driving prime revenues at big banks. Hedge funds, flush with cash and soaring equity prices, and buoyed by low interest rates, are borrowing more in aggregate.

The world's premier hedge funds have produced monster profits over the past year; their fattened wallets and frothy returns mean they can add leverage. 

Banks can only grow their prime businesses so much before bumping into regulatory hurdles and constraints on resources and capacity, but thus far the confluence of events in prime brokerage this year has amplified the multi-year trend of increasing market share among the top firms.

According to data from Wall Street consulting firm Coalition, the top-3 banks accounted for 39% of the industry's global prime services revenues in 2011. That share has grown over the past decade, topping out at 48% at the end of 2020.

JPMorgan and Goldman fall into that group of three. The world's top prime brokerage, Morgan Stanley, reports earnings on Thursday. But unlike its rivals, Morgan Stanley surprised analysts with a nearly $1 billion hit last quarter tied to the Archegos mess. Whether it's been leaning into or dialing back on prime since then remains to be seen. 

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Despite assets growing, the number of hedge funds has been shrinking for several years now. 

Every year since 2014 there have been more fund managers calling it quits than joining the fray. According to Hedge Fund Research, in 2018 and 2019, there was a combined net loss of more than 350 hedge funds, concentrating more assets with the biggest managers.

Then a global pandemic hit, and hedge funds — for the most part — did their jobs. Macro managers, stock-pickers, and distress players all were able to make money last year. And those who invest in hedge funds took notice.

Starting in July 2020, there have been three consecutive quarters where more funds were launched than were liquidated — an impressive stat since fundraising meetings and conferences ground to a halt during the throes of the pandemic. 

Advances in the digital due diligence process helped managers launch during the lockdown, but many allocators were waiting until they could travel and meet in person for writing the check, said Tom Kehoe, the global head of research for trade group Alternative Investment Management Association. 

"The biggest hurdle is getting the deal done," he said. 

Thanks to vaccine rollouts and the industry's impressive performance, new managers have flooded onto the scene to start the year. The industry welcomed nearly 200 new funds in the first quarter, the most in a single quarter since 2017, according to HFR.

Names include former WorldQuant executive Alexander Chernyy's quant fund Red Cedar and PointState executive Zachary Kurz's Pinnbrook Capital, while other pedigreed money managers have announced their intentions to start their own shops, like Soros quant John Holloway and former Blue Ridge managing director Eric Wong.

"It's definitely been a good time to launch," said Brian Guzman, managing partner of boutique law firm Guzman Advisory Partners, which works with asset managers and allocators.

"There's much more appetite, much more interest in new launches," he said. "You want the young, hungry emerging manager with their head in the game."

Time for the little guys to shine

Young managers with smaller pools of assets traditionally don't catch the eye of large institutional allocators, but with creative structures like special purpose vehicles, endowments are starting to look at a broad set of funds.

"Endowments are now looking at smaller emerging managers because their books are so unique," said Rich Passer, a partner at three-year-old hedge fund 1 Main Capital. "Five years ago, endowments wouldn't touch $10 million funds." 

Now, with many of the largest stock-picking funds concentrating on the same half-dozen tech names, small managers with books like $10 million 1 Main Capital are getting attention. 

Guzman said these big investors still require a three-year track record, but see the value in investing with a founder who "isn't spending months of the year on a $50 million yacht in the south of France."

And investors are requiring top returns now that the industry has had such a good run. According to BNY Mellon's Pershing unit, a majority of investors went from requiring returns between 8% and 9.9% to make an investment last fall to 10% to 15.9% this year.

Funds are trying to juice returns to meet this, according to note a from Morgan Stanley's prime brokerage group, which found that net leverage is close to its highest point since 2010.

Just this year, 1 Main has added roughly 25 LPs, mostly high net-worth investors, said founder Yaron Naymark. The fund is now having conversations with endowments and funds-of-funds. Its portfolio includes names like KKR and Alphabet, but also Naked Wines, RCI Hospitality, and Wayfair.  

The fund is up nearly 40% for the first half of the year, quadrupling the average hedge fund return of roughly 10%.

"I don't want to raise billions and billions," Naymark said.

At $200 million, he said, he'd stop fundraising.

"The bigger you get the harder it is to produce great returns,"  he said.

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Several hedge funds such as Coatue and Rokos have struggled to replicate their 2020 success so far this year. Eric Khrom's eponymous manager is not one of them.

Khrom Capital, which manages just over $100 million, is up nearly 47% through the first six months of the year after returning 60.8% in 2020 and 30.1% in 2019. The average hedge fund is up roughly 10% through the first half of this year, according to Hedge Fund Research, the best start to a year since 1999. 

Khrom, a former college dropout turned Forbes' 30-under-30 member, runs a concentrated book of just 13 companies on average, according to his latest investor letter. The target return for his investments is a tripling of value within five years of investing, his letter, dated July 14, reads. 

The value investing firm exited investments in Michaels, At Home, and LGI Homes as with serious gains this year, the letter states. Michaels was the shortest held position, as the firm bought in at $11 last December, a couple of months before private equity giant Apollo announced it would buy the home goods store for $22 a share.

"Though our journey with this company ended prematurely, it still produced a doubling of our investment in under a year," Khrom wrote about Michaels. 

The manager bought At Home at $5 a share in May of last year before selling this May when private equity firm Hellman & Friedman announced it was buying the store at $37 a share. The Texas-based home goods retailer was a classic case of a value investment, according to Khrom, as "part of our process involves waiting for good companies to disappoint investors' lofty expectations."

"The selloff in At Home [at the beginning of the pandemic] seemed to fit this strategy to a T," he wrote. 

The LGI investment was a four-year bet on the construction company that saw its stock go from $35 a share in 2017 to $165 this year when Khrom sold his remaining shares. 

The next bets to watch in his portfolio include Carparts.com, plastics company Berry Global, and installment lender Regional Management.

The firm just surpassed the $100 million mark, but still has plenty of room for new investors. He writes that the capacity of strategy is $1 billion. 

"Our ultimate goal remains to compound capital at the highest risk-adjusted return possible over a multi-decade period — so far, one decade down, a half dozen to go,"  he wrote. Since launching in 2008 after Khrom left Baruch College, the fund has averaged an annual return of 17.6%.

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In high school, Ryan Tolkin was trading securities at a billionaire's family office. In college, he was presenting his volatility research to a global asset manager. Now, at 34, the Long Island native is running the $8.8 billion hedge fund Schonfeld Strategic Advisors as its chief executive and chief investment officer.

How he got to his lofty perch is a combination of natural ability and extreme focus and discipline, said those who know him best. Professors described him as both intelligent and prepared, while fraternity brothers remember a driven friend who wouldn't let anything get in the way of his ultimate goals.

Schonfeld has grown into one of the industry's more prominent multi-managers thanks to years of solid performance, fundraising, and aggressive hiring. The firm's flagship fund, which runs more than $4 billion in capital, has an average annual return of more than 14% in the five full years it has been open to outside capital, an investor letter showed.

Tolkin is known for being plugged-in but not overbearing — someone portfolio managers and analysts can approach without feeling intimidated.

Now, after being appointed CEO at the beginning of the year and launching a new macro division more recently, Tolkin is riding as high as ever.

And Tolkin isn't shy about his drive. In 2018, the Duke grad told Insider that his goal for the firm was "to be the premier equities hedge fund globally." 

Most people "would certainly" describe him as ambitious, he recently told Insider. 

"Part of being ambitious is learning — learning from the best and what they've done, both their failures and their successes," he said.

A Series 7 test in between biology class and homecoming 

Tolkin's first full-time job out of college was at Goldman Sachs, but he said, "Schonfeld was the first real job I ever had."

The billionaire Steven Schonfeld, who made his fortune leading an army of traders for decades, had his family office headquartered in the Long Island hamlet of Jericho, near where Tolkin grew up. His father, Bradley Tolkin, has run the travel agency World Travel Holdings for decades, which is how Schonfeld initially met the Tolkin family.

Ryan Tolkin described himself as a kid who was interested in math and finance, and he said his first exposure to investing was a stock-picking game put on by Newsday.

"I was the person growing up who knew, for all my favorite sports teams, the ERAs of all the pitchers and all the stats," he said, referring to the figure used to measure how many runs a pitcher would give up in a nine-inning game.

As part of a work-study program toward the end of high school, Tolkin interned at Schonfeld's multibillion-dollar family office, even taking a Series 7 — a licensing exam necessary to buy and sell a number of securities— so he could trade money for the firm as a teenager.

"I think he saw in me someone very similar to him," he said about Schonfeld, adding that the billionaire wanted Tolkin to return to the family office after college.

The big-name connection didn't go to Tolkin's head when he moved from Long Island, New York, to Duke University in Durham, North Carolina.

"One of the smartest students I ever taught, but he also prioritized coursework," said Emma Rasiel, a professor at Duke who was Tolkin's advisor for his thesis.

His hard work on his thesis even got the attention of a Duke alum from Lazard Asset Management, Rasiel said. Tolkin and Michael Sloyer, who went on to be a managing director for Goldman Sachs in Japan, coauthored a thesis on the VIX as a portfolio diversifier, something Lazard was thinking about at the time, Rasiel said.

She invited the alum to listen to Tolkin and Sloyer present their work, and the conversation continued into a long dinner, she said.

"It was never enough to just have the right answer. He wanted to know how he got the right answer and in what circumstances would it not be the right answer," Rasiel said.

While his college roommate Phil Haus described the pair's fraternity, Sigma Nu, as "work hard, play hard," he said "Ryan always was laser-focused on what he wanted to do" and didn't take anything for granted.

"He literally said on several occasions that he was going to be running a hedge fund in his early 30s, and wanted to work to get there," Haus said.

Lessons from crises

Though Schonfeld hoped Tolkin would return to his firm after graduating, Tolkin chose to join Goldman Sachs in a capital-structure-arbitrage role in hopes of expanding his markets knowledge and network.

But he joined in the summer of 2008, and he was soon moved to the credit-trading team as the firm navigated the financial crisis that bankrupted peers such as Lehman Brothers.

The housing and banking crisis of 2008 was the introduction to finance for many current leaders, shaping a generation of investors and executives. For Tolkin, the consequences of poor risk management were no longer theoretical.

"One of the things that we've done best is that we have evolved as the markets have," he said. One of his many responsibilities in his dual CEO-CIO role at Schonfeld is running a quantitative risk overlay book with a 10-person team that can quickly take advantage of market events such as the trading around GameStop and the Archegos meltdown.

He added: "It's not a 'best ideas' portfolio like you'd see at other multi-managers. I share a lot of vision, input, and ideas with the team"— who are mainly quants and who research the different theses.

His ideas come from reading everything — from news reports to novels — and from his conversations with the more than 90 portfolio managers he's working with. Examples of questions include "What do flows look like? Where are the crowded areas in the market?" he said.

"It's a book we use to manage risk across the portfolio," Tolkin said.

When the pandemic shut down the global economy last spring, Schonfeld, like many equity-focused funds, took a hit. But the firm rallied, finishing the year up 9.9% in its flagship fund. This year, through June, the flagship was up 8.8%, a source close to the firm said.

"We have a saying we like to use here: Prior planning prevents poor performance," Tolkin said.

"The goal at Schonfeld is always self-improvement," he added.

From 37 to 600

In 2013, Tolkin returned to Schonfeld after five years at Goldman. He was the 37th employee at the billionaire's family office. Tolkin came in as the CIO, a lofty title for someone who was still years away from celebrating his 30th birthday.

And he didn't come to idly protect his boss' immense wealth. He saw an opportunity to grow into a serious player in finance, and he took it.

"Steven's level of trust to really transform the firm was huge," said Phil Han, a Goldman Sachs partner who works closely with Tolkin in his role as a prime broker to the fund.

Tolkin, along with Schonfeld and Andrew Fishman, the firm's president, decided to open the firm up to outside capital in 2015.

"I thought about where I wanted, with the backing of Steven, to take the business," Tolkin said. 

"If we were going to fulfill our vision of building a robust and competitive business, we were going to need some supplemental capital at some point in time," he continued.

They built out an internal long-short platform, and then international teams, partially through the 2018 acquisition of Folger Hill, which gave Schonfeld a strong presence in Asia. They added to their existing quant abilities throughout.

Now, the manager that didn't have any support staff in 2013 to help the new CIO set up his computer boasts more than 600 employees. A recent presentation on its portfolio managers showed offices across the US, Europe, and Asia.

"We say constantly that our talent is our strategy, and it was our strategy back then, too. The notion that I needed to surround myself with the right talent is the DNA of Schonfeld," Tolkin said. These investors come from big-name shops such as Citadel, Millennium, and Point72.

The most recent expansion is a foray into the macro and fixed-income space for the first time. Schonfeld persuaded Colin Lancaster, a former Citadel and Balyasny executive, to lead the space, and he has plans to hire people in the US and London to build out his team.

"I was incredibly impressed by his energy and his vision," Lancaster said of Tolkin.

"You have this leader who is deeply invested in and knowledgeable about all parts of the business. I think that is differentiated from what others have to offer," he added.

Han said Tolkin was easily one of the youngest people in his role at a major platform hedge fund, which "brings a different perspective to things. It's refreshing."

The firm is also taking steps to keep the talent pipeline flowing. Last September, it launched its Sapphire training program for analysts looking to move up the ladder.

The ambitious family man

Tolkin's achievements thus far have been impressive and led to some big-time personal purchases, including the $14 million, seven-bedroom Miami Beach mansion that he and his wife, Jefferies managing director Ariella Tolkin, bought earlier this year. (The 7,700-square-foot house on Biscayne Bay pales in comparison to the $111 million Palm Beach estate that Schonfeld himself bought in 2019.)

But business success isn't the be-all and end-all for Tolkin, the oldest of three brothers. Haus, his college roommate, called him the "quintessential big brother — the serious archetype."

"I think he got a lot of that from his dad," Haus said. He added that one of Tolkin's younger brothers, Sean, basically lived on their couch during junior year. At one point, all three Tolkin brothers — Ryan, Sean, and Conor — were at Duke. Sean is now a director at their father's travel agency, while Conor — who married Kara Dimon, a daughter of JPMorgan CEO Jamie Dimon — was poached by Wells Fargo last year from BNY Mellon.

"Family is so important to all of them," Haus said.

Lancaster, the new macro head, said Ryan Tolkin has embodied the supportive culture of Schonfeld that the firm preaches. After a vacation in early July, Tolkin sent around an email to senior staff thanking them for letting him take time off and encouraging them to take time to be with their families as well. Included in the email was a picture of his family, Lancaster said. 

"In this business, you're always wary of a surprise, of a firm overpromising," Lancaster said. "I was really impressed with the lack of surprises here."

Lancaster's own due diligence uncovered the low turnover rate among portfolio managers at the firm. He said, "I hand that to Ryan, because I think all culture things are ultimately linked to the top." Since Tolkin started, only two portfolio managers have left the firm of their own accord, a source familiar with the firm said.

Goldman's Han has watched the firm grow from accepting outside capital to the $8.8 billion firm it is now, and he's impressed with how consistent the culture and communication have been. Tolkin himself is still often involved with day-to-day discussions with Goldman — anything from capital raising to a complex, new structuring for a particular portfolio.

"It draws you in. You feel more connected to them, like you have a stake in the business they are building," Han said.

And Tolkin plans to keep building, though the next step will be a group effort, he said. 

"We are always opportunistic and open-minded to exploring new, orthogonal opportunities," he said.

Tolkin added, "I'm open-minded and encourage the team to bring me new ideas."

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In high school, Ryan Tolkin was trading securities at a billionaire's family office. In college, he was presenting his volatility research to a global asset manager. Now, at 34, the Long Island native is running the $8.8 billion hedge fund Schonfeld Strategic Advisors as its chief executive and chief investment officer.

How he got to his lofty perch is a combination of natural ability and extreme focus and discipline, said those who know him best. Professors described him as both intelligent and prepared, while fraternity brothers remember a driven friend who wouldn't let anything get in the way of his ultimate goals.

Schonfeld has grown into one of the industry's more prominent multi-managers thanks to years of solid performance, fundraising, and aggressive hiring. 

Tolkin is known for being plugged-in but not overbearing — someone portfolio managers and analysts can approach without feeling intimidated.

Now, after being appointed CEO at the beginning of the year and launching a new macro division more recently, Tolkin is riding as high as ever.

Subscribe to read our full story: Inside the rise of Ryan Tolkin, the 34-year-old investing mastermind behind Schonfeld's transformation from family office to 600-employee hedge fund heavyweight

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On June 9, Bill Ackman tweeted a vulgar Reddit video to 300,000-plus followers. 

It starred a sock puppet explaining why the billionaire hedge-fund manager's blank-check company was "the mack f---ing daddy of investments right now."

The answer was pretty simple: "Bill Ackman can do f---ing magic." 

Less than two months later, the magic ran out. 

On Monday, Ackman told shareholders in a letter that the board of his special-purpose acquisition company, Pershing Square Tontine Holdings Ltd., had axed a highly complex, three-part deal that Ackman had proposed last month. In the letter, Ackman cited the Securities and Exchange Commission's concerns about "several elements of the proposed transaction." 

The announcement stunned optimistic investors, who had cheered some innovative aspects of the deal's structure and bought into Ackman's claims that PSTH would treat retail investors better than typical blank-check companies. But it also vindicated cautious white-shoe lawyers and SPAC purists — who thought all along that the structure didn't pass the smell test — and struck some observers as a cautionary tale about what can happen when you overthink a SPAC.

The transaction would have been far more complex than the typical SPAC deal, in which a SPAC lists on a stock exchange, typically for $10 a share, and then has two years to find a company to acquire with the proceeds. Ackman dropped hints last summer that PSTH would go the more traditional route, suggesting the SPAC would find a "mature unicorn" like Airbnb to merge with. Bloomberg and Stripe were also among the rumored targets.

PSTH's shares, which had already fallen 18% in the weeks after the byzantine transaction was proposed, fell even further on the news that the board nixed it. The stock is now trading just above its IPO price of $20 per unit, a drop of nearly 40% from its February high. The firm declined to comment beyond the letter to investors.

The deal's implosion proved to be an embarrassing misstep for Ackman, already a polarizing figure on Wall Street who had been enjoying a reputational resurgence thanks to two years of stellar performance after four straight years of losses. And it landed at a critical moment for the SPAC market, which the SEC, under Gary Gensler, is watching more closely than ever. 

What's more, time is running out: The firm has only another 18 months to complete a deal. SPACs typically acquire about 20% to 25% of their target companies — meaning that Tontine's size drastically limits the potential pool.

"I don't know how many $30, $40, $50 billion companies are out there that are private and want to merge with him," one large investor in the SPAC said. 

"I think the UMG/Vivendi deal kind of highlights how hard it was for him to find targets," this person added. "There's probably some targets that don't want to deal with him because he's known to be an activist."

Now, Ackman's once-adoring fans on Reddit have turned on him, and the pressure is on to find a new target — a task one hedge-fund manager likened to "whale hunting," given the SPAC's $4 billion size. 

SPAC 2.0 didn't live up to the hype

The nixed deal was a complicated maze of financial engineering that even CNBC anchor Andrew Ross Sorkin admitted was a "struggle to be able to articulate and explain to the public what exactly this was." 

Even its name is a muddle, invoking a tontine, a European annuity-esque death pool whose payments to contributors grow as other participants die. Ackman initially planned for warrants to be distributed in a similar manner to investors who didn't opt out of the deal.

Ackman planned to purchase $4.1 billion worth of Universal Music Group shares as it spun off of Vivendi, or 10% of the new company. He'd use $2.5 billion from his blank-check company and another $1.6 billion from his other holding-company fund, with the remaining $1.5 billion pool to eventually be used for a deal to be found later (which would not have any deadlines to answer to). A third entity would confer rights on shareholders to participate in a transaction of Ackman's choosing if they so desired.

Ackman was not shy about what he saw as the genius of the deal and his SPAC overall. He was, in his eyes, launching the SPAC 2.0 era, in which sponsors wouldn't be the only winners. 

The Reddit video he retweeted came from a 16,000-member channel of dedicated retail investors who had piled into his SPAC once it went public. The billionaire courted their attention by presenting himself as a sponsor who was in it for all investors, and not just for the fees — or the founder's shares, one of the most reviled features of traditional SPACs. 

In typical SPAC deals, founders get 20% of the SPAC's shares for a nominal fee, giving them a huge, virtually free chunk of the company upon completion of a deal — even if the new company's shares tank. Ackman's SPAC scrapped this feature, as he has proudly pointed out in the past.

In Pershing's semiannual report last year, Ackman wrote that "we designed PSTH to be the most investor- and merger-friendly SPAC in the world." PSTH went public last summer and immediately became the biggest SPAC ever launched. 

"The problem is greed took a hold of SPACs," he told the investment industry publication Institutional Investor, bemoaning how SPAC sponsors, in his view, take advantage of investors. 

But Ackman claimed the SEC found that PSTH's ultimate proposal violated the New York Stock Exchange rule for what constitutes a SPAC deal, which Ackman called a "dagger in the heart of the transaction" in a CNBC interview. Among other things, that rule requires at least 80% of the SPAC's capital to be used in a transaction, a criterion that the UMG investment didn't meet, according to an investor presentation. 

UMG will also be listed in Amsterdam, adding an extra layer of complexity to the deal. 

"We also underestimated the transaction's potential impact on investors who are unable to hold foreign securities, who margin their shares, or who own call options on our stock," Ackman said in the letter. He added that his other holding company will buy the shares instead.

While Ackman dropped hints last summer that PSTH was on the hunt for a hot private company, it soon focused on UMG. A person close to the firm said Pershing had stopped looking for merger targets over the past eight months to focus all attention on the UMG deal. 

Ackman said in a presentation in June on Universal that several factors — including the fact that Universal held the rights to a song written by his grandfather, Herman Ackman — left him "a bit like a dog that grabbed the bumper of the car and wouldn't let go."

At law firms, some were skeptical

Ackman had assembled a top-notch legal team to work on the deal. In his CNBC appearance, he name-dropped Joe Shenker and Scott Miller, two top lawyers at Sullivan & Cromwell, and Stephen Fraidin and Greg Patti of Cadwalader, who helped take the vehicle public. Some sponsors asked their lawyers about doing something similar.

But some lawyers were not surprised the UMG deal couldn't go through. A person close to Pershing said some top law firms even sent memos to the SEC sharing concerns about the construction of the deal, though Insider could not confirm the veracity of the claims, and the SEC did not respond to multiple requests for comment.

"Innovation and creativity, like Bill Ackman's de-SPAC transaction, often have complications, and I think there were some issues they maybe didn't anticipate," said Doug Ellenoff, a founding partner of Ellenoff Grossman & Schole, a longtime leader in blank-check-company offerings.

Another SPAC lawyer who didn't want to be quoted criticizing regulators said the powers that be are taking a harder line than they did in the last administration. "In today's environment, you have a less business-friendly SEC," one inclined to "take a stricter reading" of a SPAC's prospectus, the lawyer said.

Ackman seemed to think he was on solid legal footing. A source close to Ackman said that he had described the contours of the deal to the New York Stock Exchange over six months and that the exchange was OK with the structure. (The NYSE declined to comment.) 

Pershing Square's plan to distribute UMG shares to its investors wasn't totally novel. Silver Eagle Acquisition Corp. did something similar with shares of the Indian pay-TV operator Videocon d2h in 2015 — though there were also major differences, such as the fact that Silver Eagle dissolved afterward.

More recently, Spinning Eagle Acquisition Corp., which was sponsored by the same people who backed Silver Eagle, filed plans with the SEC to raise $2 billion and plans to spin off another SPAC if it doesn't use all the funds it raises in its IPO. But that company made its plans clear in its prospectus, and unlike the Tontine company, its successor would also be a SPAC.

"What Ackman was doing was a much more complicated thing," said Joel Rubinstein, a lawyer at White & Case working on the Spinning Eagle deal.

At least one investor in Ackman's blank-check company was glad to see that the deal didn't go through. This person, who spoke on the condition of anonymity because they are not authorized to speak publicly on their fund's positions, said the lack of protections for investors in the remaining investment pool gave Ackman too much power.

They said the pool did not have the same expiration date as the SPAC, giving Ackman a pot of capital with no deadline forcing him to spend it.

"That is not what the market is supposed to be built around," this person said. "It's a net positive that permanent capital isn't allowed."

A mutiny on Reddit

The failed Universal bid cast a negative light not only on SPACs — for which public excitement has already cooled in recent months — but also on Ackman himself. The saga disappointed his once-ardent fans on Reddit, who had been speculating for months on what the SPAC's target would be.

In the subreddit r/PSTH, members — who call themselves "tontinites" or "tontards" (a play on a slur for people with intellectual disabilities) — posted discussion threads, news, and other information about Ackman that might give clues about the deal. There was also a healthy dose of memeing: Fans superimposed his face onto the action movie star Bruce Lee and gushed over media appearances.

Ackman took notice.

"I am following the Reddit group, and I am working very hard not to disappoint them," he told Institutional Investor in March. "I'm even more motivated to move the needle for the little guy than I am for the big guy."

After this week's failed deal, tontinites are singing a different tune.

Talk of filing a class-action lawsuit has bubbled up. One user, who said they were fed up with following the saga so closely, said "as for BA being sketchy, in hindsight I agree."

The memes have taken a similar turn: Ackman's face on a voodoo doll, Ackman replaced by a pile of poop in a yearbook photo. Ackman's face on Bruce Lee has been replaced by Ackman's face on a snake.  

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Billionaire investor David Einhorn predicted inflation is here to stay, and explained why rising prices will benefit his stock portfolio, in his second-quarter letter to investors this week.

"There are too many dollars chasing too few goods and services," the Greenlight Capital founder and president said in the letter, published by ValueWalk. "We have reached a structural change in inflation."

Einhorn drew a distinction between temporary bottlenecks that have spiked the prices of lumber and other goods during the pandemic, and lasting shortages fueled by broader trends such as the electric-vehicle boom and years of insufficient house-building.

The hedge-fund manager added that it's impossible to rapidly boost the supply of some products, so their prices will have to rise to dampen demand.

Einhorn noted that investors have plowed their cash into high-flying technology companies, starving traditional businesses such as mills and miners of capital. As a result, the latter group have underinvested in their facilities for years, and now lack the money to ramp up production as the economy reopens. They will have to hike their prices to generate bigger profits and attract investors, Einhorn said.

The Greenlight chief also argued that if bosses raise wages to lure back employees, and the Federal Reserve continues "tinkering" with its expansionary policies instead of aggressively addressing inflation, that would be a recipe for higher prices.

Einhorn clearly expects the current surge in inflation to persist, but he assured his investors that Greenlight's stock portfolio will benefit if he's right. He pointed to Green Brick Partners, a homebuilder and his fund's largest investment, which is likely to benefit from rising house prices. His other holdings function as bets on higher prices for air cargo, copper, cement, paper, thermal coal, and natural gas, he added.

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Millennium has struck again, raiding another sell-side desk to acquire a new portfolio manager for its growing volatility-trading business. 

The target this time was JPMorgan, one of the industry's best derivatives trading outfits and a firm that until recently had been shielded from the buy-side poaching war that afflicted rivals. 

Borzu Masoudi, head of equity macro derivatives at JPMorgan, has resigned to join Millennium, according to sources familiar with the matter. 

A Millennium spokesman declined to comment. A spokeswoman for JPMorgan also declined to comment. 

Masoudi joined JPMorgan three years ago from Goldman Sachs, where he was a key trader on a team that reaped $200 million from "Volmageddon," when the VIX suddenly spiked to record levels in February 2018. 

Masoudi was promoted to managing director last summer, on the heels of stellar performance from JPMorgan's equity-derivatives franchise. Before the end of March 2020, as the Covid-19 outbreak roiled markets, the firm had produced $1.5 billion in equity derivatives revenues— around what the entire equities unit produced in the first quarter a year earlier, Bloomberg reported. 

The flow volatility team — which trades products like the VIX and derivatives linked to ETFs — brought in $700 million in the first half of 2020, almost triple its performance for all of 2019.  

For most of this year JPMorgan had largely avoided the senior defections that afflicted some of its peers. Spencer Cross left this spring to run US index volatility at Bank of America, and more recently the firm parted ways with Ishan Malik, an ED who traded the VIX.

Bank volatility desks raked in hordes of cash industry wide amid the market shocks from the pandemic, and that has contributed to a frenzied hiring market in 2021 as hedge funds fight over the top performers. 

Millennium previously hired Benjamin Texier from Citigroup and Michael Hosana from Barclays. 

Millennium started ramping up its equity volatility presence four years ago — around the time Pete Santoro and Bobby Jain, two derivatives veterans, joined senior management — amid a broader diversification effort, and it's become a core strategy within its equity arbitrage group, according to sources familiar with the matter. Izzy Englander's $49 billion fund grew to 265 investment teams in 2020 — the most in its history — amid a flurry of new hires.

This story is developing.

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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. 

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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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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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 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 has lost $1.5 billion this year thanks to a bet on rising interest rates that 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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