2023 saw huge volatility on markets with overseas stock exchanges rising by tens of percentage points, leaving the Tel Aviv Stock Exchange (TASE) far behind. The TASE's tepid performance followed the judicial overhaul and the large-scale public protests against it, and then from October the outbreak of the war.
So how did Israel's hedge funds - which are supposed to yield better returns for investors through a range of investment options and hedging, financial and leveraging instruments - perform in these uncertain market conditions.
An examination of Israeli hedge fund performances by "Globes" found that Israel's most prominent hedge funds, for the most part, did their job. Most of these funds invested in equity options and managed to register an excess return over the main local indices, on average producing a return of 11.5% - significantly higher than the Tel Aviv 125 Index, which only rose by 4% in 2023. The reason was the increasing focus by the funds on investments abroad, where the indices produced much better performances. However, over the last three years, the performance of these funds is more lukewarm - they rose on average by 16.4%, while the Tel Aviv 125 index rose by 20.3%.
Even the prominent hedge funds that focus on bonds excelled in 2023, with average returns of 10.2%, double the returns of the Tel Bond 60, which includes the biggest corporate bonds on the TASE. Over the past three years these funds recorded average annual returns of 23%, far outperforming the Tel Bond 60, which rose by just 3.4%.
The yield leaders in the hedging industry last year were those funds that invest in technology-biased stock indices, or simply in prominent stock indices abroad such as the S&P 500 and Nasdaq. In 2023, funds that "stuck" to these stocks enjoyed a phenomenal return of tens of percent, after a difficult year in 2022, in which technology stocks and indices fell abroad, due to the jump in interest rates and the surging inflation that afflicted the world.
Lukewarm figure in veteran fund
Sphera senior executives say that they recognized the potential inherent in investing in technology stocks, precisely at the stage when the indices fell. Sphera is one of the oldest hedge fund groups in Israel, founded 20 years ago by Doron Breen and Ron Senator, and the late Israel Mor.
The Group's veteran hedge fund, known as Masterfund, or Sphera LP, suffered heavy losses in the first half of the year, later recovered and ended 2023 breaking even - a weak figure relative to the industry. The fund explained in a letter to investors that "In retrospect, the process of changing the structure of the investment portfolio and adapting it to the political and economic environment was not crisp and fast enough. We were led to think that logic and common sense would dictate the political and economic agenda in Israel during the year."
However, when it comes to the technology fund it founded - Sphera Tech - it was a different story. This is a fund that managed to secure second place in the returns table after more than $500 million was raised from investors in Israel and abroad, a huge amount in Israeli terms (a minimum $500,000 per investor). This fund gave investors a return of 29% last year.
Sphera Tech invests in global tradeable tech companies with a market cap between $5 billion and $50 billion. The fund stated in its letter to investors for the start of 2024 that it will focus on the field of AI "which is changing direction and moving to a new phase." The fund also anticipates accelerated growth in cybersecurity, due to regulatory instructions and consolidation procedures in the field. Others believe that the time has come to invest in solar energy.
Among companies that interest Sphera Tech is transport app Uber. "We have been following Uber since Covid, and are particularly impressed by the growth strategies in its core business," the fund's website says, observing that a stable duopoly of Uber and Lyft has been formed in the US. They also state that they are interested in the food delivery market.
"Balanced exposure to high-tech"
The timing of the raising of the fund in September 2022, as tech indices fell, was successful, Sphera Tech Fund's founder Ron Senator claims. Talking to "Globes," he insists that the best time to found a fund is precisely when the the market looks bleak. He says, "Precisely when no one is 'throwing money at you' for investment, you know it's the best time to start a fund." Sphera Tech is managed by Nadav Zeller, who joined Sphera as an analyst in 2012 and is a managing partner in the Sphera Tech Fund, and Eli Uzan, who previously managed part of Facebook's operations in Israel and held senior positions at Google Israel.
What was the rationale behind founding the fund?
Senator: "We had been toying with the idea for over a decade. The fund was born as a result of the 'ecosystem' that emerged in Israel. We are known as a 'Start-Up Nation'; there is a lot of enthusiasm, motivation and stories of startups and technologies and innovation here.
"We wanted to take the attention away from investments made in technology companies in their early stages, towards investments in more mature companies. So far, nothing has been built and developed here that focused on such companies. The fund we established looks globally at the field of technology, and not just at Israel, which from the fund's point of view is another angle."
Last year there was a lot of talk about the Magnificent Seven - the shares of the tech giants Apple, Microsoft, Google, Amazon, Nvidia, Facebook and Tesla, which were responsible for a large part of the rises in the Wall Street indices. Senator said, "We manage the exposure in a more balanced way. We will not hold 10% of the investment portfolio in Microsoft shares (weight in the Nasdaq index). This is not part of our discipline.
Much has been said about the Magnificent Seven but are any of you interested in investing in them?
Uzan: "I am optimistic when I look at Meta (Facebook). Its stock suffered from several factors such as the TikTok threat. In the past, Meta had a significant impact on investment returns that advertisers saw, and also disappointment from investment in the field of the Metaverse (virtual reality). They overcame the return on investment problems of advertisers using Generative AI. Today Meta analyzes, for example, how long users spend on the various apps in order to give them accurate advertisement targeting."
What is your advantage in working from Israel?
Zeller describes the Israeli tech industry as one that is maturing and producing knowhow that is required by investors. "There has been an evolution here among Israeli tech companies in the last decade," he says. "If in the previous decade companies were thinking about how to sell themselves, today they are thinking about how to maximize business potential of the technology. Global companies are also using Israel, or in R&D here."
Uzan: "In the end we realized that we can get direct access to a lot of information from mature technology companies (here). It's easy to reach people here to do proper checks on a company. We can deeply analyze investment ideas (theme) and examine new trends."
Don't you think the AI trend has become a bubble in the markets?
Senator doesn't think so. He mentions that the AI sector is expected to undergo a gradual process of evolution. "In the beginning there were the chips (chip manufacturers for the field such as Nvidia) that is - the material, then came the cloud, and later came Israeli companies such as Wix (producer of websites) and monday.com (optimizing procedures in the workplace). These can now take advantage of AI and produce added value."
Senator also recalls that in 2000, when the previous tech bubble burst in the markets, companies on Nasdaq traded "according to irrelevant multiples and values. People invested in companies and didn't see any money from it."
Whereas today, Senator stresses, these are strong and profitable companies of a different order of magnitude, which are not afraid to become more efficient when necessary. "In recent years, Meta has cut a quarter of its workforce, Microsoft has made capital investments of $30 billion, and a super-aggressive efficiency campaign has been launched there."
How does the war that broke out in Israel affect technology activity?
Senator: "Most of the companies here are in the software sector, so there are no effects in production and supply chains. I can't think of a single Israeli company that in the fourth quarter was affected by the war. This is an estimate before the reports are published, but if there was a worsening of their situation, they would have reported it. In general, many of the companies here are global."
The industry has consistently grown
Hedge funds are not designed for every investor. They are only open to qualified investors, those with liquid capital of at least NIS 8 million and institutional entities. This is not a cheap product. The management fees charged by the fund managers are much higher than those of the investment instruments open to the public - around 2% of the investment amount annually. On top of that, hedge fund managers charge a success fee of 20% of the return they achieved during the year. The exit mechanism is also not immediate and involves advance notice, and the money is only received after several months.
The hedging industry, to which many of Israel's most prominent investment managers have moved, enjoys higher pay and greater freedom of action, and is steadily growing. Data from the Gilboa indices that follow the industry show that at the end of 2023 there were 177 hedge funds operating in Israel that managed assets worth $16.4 billion, 3% up on 2022.
The average hedge fund in Israel manages assets worth $92 million. About 23% of the funds manage investments focusing on Israeli stocks, another 18% on global stocks, about 17% invest in diversified strategies and 13% in the debt market (the balance invests in diverse fields).
Returns data for 2023 show that Shahar Cohen's Lucid Alternative hedge fund, which calls itself "the fund of the 'geeks'" led the table above Sphera Tech. Lucid ended the year with returns of 36.3%. Cohen previously managed the tech trust fund of the More investment house, and has served in various positions in Silicon Valley, and founded Lucid in May 2022.
These two funds outperformed the S&P 500 index, which rose 22% in 2023, but underperformed compared with Nasdaq, which rose 43% last year. Also highly ranked was Altshuler Shachem's Netz hedge fund, with returns of 21% last year (before including December data). However, over the past three years, Netz recorded a similar return.
At the bottom of the return table of equity funds was the Sphera LP hedge fund, which broke even in 2023, and rose by 11.3% over the last three years. Just above it was Guy Partners' Equity Opportunities Fund, which rose 2% last year and fell 4.5% over three years.
Outstanding among the bond funds last year was Var Opportunities, managed by Matan Pasternak, with a return of 19.7%, and 55% over the last three years. At the bottom of the table was Noked Bonds, with a return of 6.8% in 2023, and up 14.9% over the past three years.
In a letter to investors sent by the Noked hedge fund, led by Roy Vermus and Shlomi Bracha, formerly of Psagot investment house, cautious optimism was expressed for 2024 on the Israeli market. They say, "Economic activity in Israel is already expected to return to the growth that the economy showed on the eve of the war. The recovery of the economy and a certain fading of security uncertainty at the end of the main phases of the Gaza war are expected to have a positive effect on the local stock market performance."
Published by Globes, Israel business news - en.globes.co.il - on January 28, 2024.
© Copyright of Globes Publisher Itonut (1983) Ltd., 2024.