Dan Sundheim of D1 Capital Partners has learned a valuable lesson in humility after experiencing significant losses not once, but twice, in just two years. The manager of the once-celebrated Tiger Grandcub hedge fund faced a humbling 31 percent loss in January 2021 during the infamous meme stock frenzy. After a strong recovery later that year, D1 Capital suffered another substantial downturn in the first half of 2022.
These dramatic events prompted Sundheim, a Viking Global Investors alumnus, to implement significant changes aimed at mitigating risk, reducing aggressiveness, and enhancing diversification within the fund. This strategic pivot has proven successful.
D1 Capital’s public portfolio has surged over 34 percent year-to-date through September, building on a 19 percent gain in 2023. Since the firm began implementing these strategic adjustments 28 months ago, the public portfolio has impressively risen by 85 percent. This remarkable turnaround has brought D1 Capital within striking distance of its previous high-water mark. While D1 Capital and Sundheim, who are currently hosting their semi-annual investor meetings this week, have declined to comment, the numbers speak volumes about the fund’s resurgence.
Sundheim established D1 Capital in July 2018 after a successful tenure at Viking Global Investors from 2002 to 2017, where he served as sole chief investment officer for the final two years. Viking Global was co-founded by O. Andreas Halvorsen, a former analyst at Julian Robertson Jr.’s legendary Tiger Management.
D1 Capital demonstrated exceptional performance in its initial years, posting gains of 36.8 percent and 60.7 percent in 2019 and 2020, respectively, according to investor reports. The firm also became a prominent player in venture capital, with its private portfolio soaring 57.5 percent in 2020 and an impressive 70.6 percent in 2021.
Despite the private portfolio’s continued success into 2021, D1 Capital’s public portfolio encountered severe headwinds at the start of that year. In January 2021, D1 Capital became one of the high-profile hedge fund casualties of the meme stock phenomenon. This event saw retail investors, mobilized through social media platforms, coordinate to aggressively buy shares of heavily shorted, often fundamentally weak companies. GameStop, a significant short position for D1 Capital, was a prime example.
This coordinated attack inflicted substantial losses on several hedge funds, notably Melvin Capital, led by Gabe Plotkin, which ultimately closed down.
By the close of January 2021, D1 Capital was down 31 percent. To prevent further erosion, Sundheim took decisive action, covering all short positions and ceasing shorting individual stocks. Instead, he opted to use basket indices for hedging purposes. This strategic shift facilitated a remarkable recovery. By October 2021, D1 Capital had recouped all its losses, fueled by a 40 percent surge over the subsequent nine months. Ultimately, the public portfolio finished the year flat, according to investor information.
However, the reprieve was short-lived. 2022 brought fresh challenges as the stock market plunged into a bear market. D1 Capital experienced a 34 percent loss in 2022, with the majority of these losses occurring within the first five months of the year, as per investor reports.
Concurrently, D1 Capital’s private investment portfolio faced significant markdowns. Private market valuations, in general, were sharply reduced amidst the broader stock market downturn, negatively impacting the venture capital landscape. These substantial losses in both 2021 and 2022, coupled with investor pressure, prompted Sundheim to implement significant changes to the firm’s portfolio strategy and risk tolerance in June 2022.
D1 Capital, known for its focus on industrial and consumer stocks, restructured its investment team and broadened its coverage to encompass a wider range of industries and stocks. The number of companies covered expanded from approximately 600 to over 800 currently. The firm also reintroduced single-name short positions into its strategy.
Perhaps more crucially, D1 Capital significantly reduced its risk profile. From its inception in July 2018 to May 2022, the firm’s average gross exposure stood at 218 percent, and net exposure averaged 67 percent. Since June 2022, these figures have been drastically reduced to 165 percent and 28 percent, respectively, according to investor sources.
Diversification within the short book was also increased. Currently, the top ten short positions constitute 27 percent of capital, compared to an average of 40 percent at the time of the GameStop event, according to sources. This strategic overhaul has not only driven a sharp performance rebound but also strengthened the firm’s Sharpe ratio, a key metric assessing investment performance relative to risk-free assets, to a robust 2.8.
Of the 85 percent gain realized since June 2022, 26 percent originated from industrials, 15 percent from consumer stocks, 10 percent from software, 8 percent from internet holdings, 6 percent from healthcare, 5 percent from business services, 5 percent from media, 4 percent from real estate, 3 percent from financials, 3 percent from hardware, and 1 percent from communications, as detailed by investors. This diverse distribution underscores the broad-based nature of D1 Capital’s gains.
This year’s performance has been primarily propelled by industrials and consumer stocks, which together account for nearly two-thirds of the gains. Approximately 65 percent of D1 Capital’s capital is allocated to North American stocks, with 30 percent invested in European equities.
Notable contributors to the fund’s success this year include Instacart parent Maplebear and tobacco giant Philip Morris. As of the end of June, these two stocks combined represented approximately one-quarter of D1 Capital’s U.S.-listed common stock long portfolio, according to regulatory filings.
Within the industrials sector, European stocks such as energy technology company Siemens Energy and aerospace and defense company Rolls-Royce Holdings have also delivered strong performance, according to investor sources.
While D1 Capital’s public portfolio is currently experiencing a strong upswing, its private investments continue to face headwinds amid a broader downturn in the venture capital and IPO markets. D1 Capital marked down its private portfolio by 15.7 percent in 2022, 10.2 percent in 2023, and 2.6 percent year-to-date. The top ten private holdings now constitute 60 percent of the portfolio, led by a significant stake in SpaceX, valued at approximately $2.5 billion, representing about 25 percent of the private portfolio.
D1 Capital also achieved a notable success with Lineage, which went public earlier this year. Nevertheless, since the firm’s inception, the private portfolio has generated a return of 122 percent, while the public portfolio has posted a gain of 109 percent, net of fees.
The critical questions now are whether Dan Sundheim can sustain D1 Capital’s newfound success and whether he will maintain this less aggressive investment strategy. The coming years will be crucial in determining the long-term impact of these strategic shifts and D1 Capital’s trajectory in the competitive hedge fund landscape.
