Start-up hedge fund XN sees chance to bet against Spac boom

XN, one of this year’s largest new hedge funds, has returned 46 per cent in its first five months of trading, and sees opportunities to bet against the growing number of companies listing through blank cheque vehicles.

Performance gains at the New York-based investment fund, which raised more than $1bn when it launched in July, came from positions in companies such as social media group Pinterest and online luxury fashion retailer Farfetch, according to an investor letter seen by the Financial Times.

Gaurav Kapadia, founder of XN, said in the letter that the fund also saw opportunities to bet against an “ever-expanding crop of newly public companies”, including groups that went public through special purpose acquisition companies, where “in many cases the incentives are precisely wrong”.

Spacs — which raise cash on the stock market and hunt for a private company to take public — have emerged as the hottest product on Wall Street this year.

The vehicles, which are also known as blank cheque companies, can create big pay-offs for their sponsors, who receive a 20 per cent stake that converts into a potentially lucrative slice of equity in the merged company. Some governance experts have warned this structure can create misaligned incentives, pushing Spacs into bad deals by the end of their typical two-year lifespans.

“In some cases, these companies have been fuelling ‘story hysteria’,” Mr Kapadia wrote in the investor letter. “When economic reality inevitably sets in, we believe there will be substantial downside.”

XN’s gains are notable in a year that has roiled the hedge fund industry, with the market fallout from the coronavirus pandemic creating big gaps between winners and losers.

Mr Kapadia started XN after leaving Soroban Capital, an equity hedge fund manager he co-founded in 2010. Soroban returned capital from its more than $4bn flagship strategy in 2018 to focus on a more concentrated portfolio of stocks.

XN began as a family office in 2019 and started trading outside capital in July. In the five months from then until the end of November, the S&P 500 index gained 16.8 per cent and a Hedge Fund Research index for equity funds rose by 13 per cent, by comparison.

The fund gained 19.6 per cent in November alone, according to the investor letter, a month when the S&P index was up 10.8 per cent.

XN “did not anticipate the pacing of returns” this year, Mr Kapadia said, and had quickly moved money from “lower-return investments to higher-return opportunities” since October. He said more than half of the fund’s returns came from securities with market capitalisations below $25bn.

Investors in XN agreed for up to 35 per cent of their capital to go toward private investments, an increasingly popular strategy for new hedge funds. By putting money into less liquid areas of the market, such as unlisted securities, managers hope to generate higher returns.

Mr Kapadia said XN had so far made four investments in private companies, including plant-based meat company Impossible Foods and orbital rocket manufacturer Relativity Space.

The letter also said XN had brought on Jan Bennink, a veteran consumer industry dealmaker, as an executive partner working on new investment opportunities. 

Mr Bennink is best known as a chief executive who has secured sky-high valuations when he has sold his companies. The Dutch executive sold baby food group Numico to Danone for $17bn in 2007 and later sold coffee maker DE Master Blenders to JAB for about $10bn in 2013. 

“We have followed Jan through stops at multiple companies, in different regions, executing different strategies, in multiple categories,” Mr Kapadia wrote in the letter. “Each time, Jan has led business transformations while showing impeccable commercial instinct.”

Mr Bennink, who will help XN pick investments in the US as well as Europe, will join Carl Bass and Rob Marcus, former chief executives of software group Autodesk and cable operator Time Warner Cable, respectively, who have been with XN since February.

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