Investors pay managers like Bill Ackman high fees (2 and 20) to simply own obvious mega-cap tech stocks. The real product isn't alpha, but "conviction-as-a-service." The fund provides the confidence for Limited Partners to stick with a clear winning strategy they lack the personal fortitude to execute and hold on their own.
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Viewing stock investing as outsourcing capital deployment changes the paradigm. Instead of buying a ticker, you're partnering with the world's best managers who allocate capital on your behalf to grow the business. This provides access to elite talent without the "2 and 20" fees of a hedge fund.
The venture market has shifted from seeking contrarian bets to piling capital into consensus winners, even at extreme valuations. The new logic resembles the old adage "you can't get fired for buying IBM," where investing in a perceived leader with a 1x preference is deemed a safer, more defensible capital allocation decision.
Adrian Meli saw the hedge fund space becoming crowded, compressing gross returns. He theorized that applying hedge fund research intensity to a lower-fee, long-only structure could achieve superior net returns for clients, a contrarian bet that paid off.
Investment gains often come from "multiple expansion," where the market's perception of a business improves, causing it to trade at a higher valuation. This sentiment shift is frequently more impactful than pure earnings growth, and underestimating it is a primary reason for selling winning stocks too early.
The ultimate advantage in asset management, used by Warren Buffett and Bill Ackman, is 'permanent capital.' This structure, often a public company, prevents investors from withdrawing funds during market downturns. It eliminates the existential risk of forced selling that plagues traditional hedge funds.
To overcome LP objections to layered fees, fund-of-funds must deliver outsized returns. This is achieved not by diversification, but through extreme concentration. By investing 90% of capital into just 10-13 high-potential "risk-on" funds, the model is structured to outperform, making the additional management fee and carry worthwhile for the end investor.
Public market investors feel compelled to buy into major AI IPOs, even if they doubt a company's fundamentals. The strategy is driven by market dynamics: the expectation of a 'pop' from massive retail investor demand forces funds to participate to avoid underperforming their benchmarks.
While indexing made competition tougher, the true headwind for active managers was the unprecedented, concentrated performance of a few tech giants. Not owning them was statistically devastating, while owning them reduced active share, creating a no-win scenario for many funds.
In fast-moving public markets, waiting for a full investment memo can mean missing the opportunity. D1 Capital starts buying a position while the memo is being written, using it as a final diligence check rather than a prerequisite for action. The conviction is built through dialogue long before the final document.
Mega-funds like a16z operate on a different model than smaller VCs. They provide Limited Partners with diversified, almost guaranteed access to every major tech company, prioritizing strong absolute dollar returns over the high multiples sought from smaller, more concentrated funds.
