Tech hedge fund beats Nasdaq by looking at key inflection points

Silicon Valley-based Light Street Capital beat the Nasdaq due to investing in opportunities identified around shifts for nearly a decade. (AP pic)

NEW YORK: Lucrative opportunities in technology stocks center around identifying shifts from an old way of doing things to a better way, like from email to instant messaging or from phoning in food orders to doing it online.

Investing with that in mind for nearly a decade has helped Silicon Valley-based Light Street Capital beat the Nasdaq, according to Barron’s in its May 27 issue.

Since its July 2010 inception, the firm’s long-short strategy has topped the Nasdaq’s 17.5% net annualized return with one of 19.1%. Its US$1.5 billion Light Street Mercury Master fund hasn’t outpaced the benchmark so far, returning 16% after fees through April 30, versus 22% for the Nasdaq at that point. But the year isn’t over.

Glen Kacher, Light Street Capital’s chief investment officer, and Jay Kahn, a partner at the firm, say Slack Technologies Inc.; UK-based restaurant delivery company Just Eat Plc and online apparel retailer Farfetch Ltd. are some of their top picks, according to Barron’s.

Slack is scheduled for a direct listing next month. The company’s free instant messaging service has a potential market of more than 200 million users and is only 5% penetrated, Kacher, a former analyst at Julian Robertson’s Tiger Management, told Barron’s.

“The opportunity is that what we’ve been doing at work – using email for the past 20 years – is shifting,” Kacher said. “And there is one major winner in that shift: Slack.”

The global shift to ordering food online is clear as well. As Inc. leads a US$575 million investment in London-based startup Deliveroo, pitting it directly against Uber in a cutthroat European food delivery industry, Just Eat is “a great business,” said Kahn. It trades at about half the valuation of peers NV and Delivery Hero SE and should grow somewhere around 20% to 30% a year globally, he said.

Along the same lines, luxury goods online retailer Farfetch is seen as a solution for small businesses in Paris, Tokyo or Brazil who need to tap into the growing online market but don’t want to sell their products through because they can’t control prices or the look of the products.

“Luxury-goods penetration online is only about 9% today, versus e-commerce apparel penetration, which is in the high teens in the US and low-20s in China,” said Kahn. Farfetch was founded to solve this problem, he said.