As the largest hedge fund in the UK, Capula Investment Management has accrued assets under management to match some of Wall St’s finest — $100 billion across in total across its funds that span the US and Singapore. This dwarfs the likes of Brevan Howard and The Man Group, the next largest. The London-based hedge fund focuses on fixed income, macro, and crisis alpha strategies, all of which should have stood it in good stead for 2022. Yet Yuan Huo, the former JP Morgan analyst who founded the group in 2005, has failed to pounce on the macro chaos in the same way that his peers at Brevan Howard has.
The UK entity’s profits were down from £148 million in 2021 to £98 million in 2022. Mr Huo received £28 million, with £71m between the remaining 25 partners, an average of £2.8m per partner. In 2021, the firm paid Huo and the rest a combined £152m. In the year to March 2022, this was down to £99 million. With Capula’s profits going down year-on-year since 2020, it would seem that Capula has not been immune to some of the macro headwinds markets have seen in the last year.
Strong Performances
Since Capula deploys through multiple funds, data is scant on holdings and strategies. There is, however, some visibility on the holdings of the Capula LTD entity, through its US regulatory fillings. It’s important to note that this only represents around $8 billion of its AUM. Capula Management Ltd’s top holdings are SPDR S&P 500 ETF Trust, Microsoft, United Parcel Service, and Apple. The largest increases in either portfolio allocation and/or share price during the last quarter include: the S&P 500 ETF Trust (Put), UPS, Van Eck Semiconductors ETF, The Financial Select Sector SDPR Fund, and Bank of America. While analysing the S&P 500 can be a banal task, the index has been resilient over the past months as US inflation data has come in lower than expected, 5% on a yearly basis in February from 5.3% in January. Unemployment has stayed steady at around 3.6%, despite the first uptick in unemployment benefits.
In the geopolitically-charged semiconductor industry, Biden’s hawkish Executive Orders aim to “restrict [China’s] ability to obtain advanced computing chips, develop and maintain supercomputers, and manufacture advanced semiconductors” used in military applications. The new rules won’t apply to foreign makers of chipmaking equipment, including leading firms such as the Dutch ASML.
But the administration’s second rule could potentially address that by making it easier for BIS to put companies on its corporate blacklist if their home governments demonstrate “sustained lack of cooperation” with U.S. trade policy. In March, the Dutch Government followed American coercion, as, “the government has come to the conclusion that the existing export control framework for specific equipment used for the manufacture of semiconductors needs to be expanded,” foreign trade minister, Liesje Schreinemacher said. With ASML the only supplier of advanced Lithography machines, Capula expects the addition of US subsidies for reshoring, and increased future demand for advanced chips for LLMs like GPT4 will see a subsequent rise in prices.
Finally, Capula’s bet on Bank of America seems untimely with the banking crisis that left SVB and Credit Suisse out to dry. Yet perhaps presciently, after jitters at Deutsche Bank were smoothed over, the banking sector looks to have got over those fears. Bank of America was one of the beneficiaries of SVB as it received $15 billion of new deposits in the following days. “Too big to fail” looks to be a good bet for both depositors and Capula.
Big Tech Exposure
Some of the biggest decreases include the S&P 500 ETF Trust (call), IShares Russell 2000 ETF, Apple, Microsoft, Johnson & Johnson, and Tesla. Capula’s decreasing exposure to Big Tech comes as both Apple and Microsoft have been hit by declining revenues as households and business reduce expenditure on both software and hardware. Apple’s sales were down 5.5%, with Tim Cook sighting supply chain pressures, a strong dollar, and the general macro situation. In addition to weak iPhone sales, Apple’s app store business, that is currently in an antitrust case against Epic Games, has been hit on both the in-app purchases and incipient advertising components. Apple did, however, report 6% growth in its services business, beating analyst expectations. It remains to be seen whether Apple’s buy-now-pay-later product will be a hit.
Microsoft’s cloud business’ growth slowdown was also inevitable with rising interest rates hampering many of the data-intensive startups that use Azure. Similarly to Apple, in its hardware business, devices revenue decreased 39%, as PCs fell from pandemic highs. Still, there appear to be silver linings for Microsoft that Capula may not have accounted for. Microsoft completed a “multibillion dollar” investment in Open AI, before it began integrating Chat GPT into its services. It began with the launch of Bing Chat, which hit 100 million daily active users just weeks after launching. Moreover, it has shipped Chat GPT integrations into Excel and Word. This looks likely to let it take on Google in advertising while further enhancing value of its legacy products. With Google’s Bard model way behind, it is possible we may see a new era in search. There was other positive news for Microsoft in social networking as LinkedIn revenue surged by 10% too, although with floods of Chat GPT-written content, this might be harder to sustain in the long term.
A Mixed Picture
Capula seems to have been afflicted by the double edged sword of accumulating a war chest of AUM. On the one hand, it can deploy its capital into a wider array of asset classes and fund strategies to gain alpha. Certainly, Capula has been delving deeper into the macro crisis and fixed income elements of its thesis than we have covered here. But perhaps its lower returns than the likes of Brevan reflects its lower risk appetite. That will produce consistent returns, yet hedge funds need more than consistent returns to justify the fees. While Capula generated those in 2017, the masses of assets they have pulled in since have brought greater responsibility — and with that, lower but steadier returns.
Author: Tal Feingold
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