Coatue Management, the $10 billion long/short equity hedge fund led by "Tiger Cub" Philippe Laffont, is one of the most prolific investors in technology companies.

Speaking at the MIT Sloan Investment Conference on Friday, David Scully, a partner and the chief marketing officer of Coatue, shared some insights into how the fund thinks about making its tech investments.

Both Scully and Laffont have taught a class at MIT on tech investing in the past. 

The fund's investment process isn't what you'd expect. In fact, it goes against some of the investing adages we're used to such as "buy low, sell high." 

"Perhaps the right way to think about this is not to buy low, but to buy high," Scully said. "Now I say that partly only tongue-in-cheek because it turns out that a great way to find new trends and potential winners is to look at stocks that are expensive. We like to call that 'dreaming the dream' and we believe this kind of optimism is essential, especially in the early stages of analysis."

Google, for example, dominates the search engine business in the US, Europe, and other markets. Companies like Google are rarely cheap and can often look expensive. Google went public in 2004 at $85, Scully noted. When it shot to $109 a share and was trading around 40-times consensus estimates some thought that it was expensive, he added. The stock has risen more than 1,200% since its debut.

During his presentation, Scully said that you want to first spot and analyze the new trends. Then, you try to identify the winner and figure out if that company has the business model and the intellectual property to capture the lion's share of the profits. Along the way, you want to be aware of the two "great white sharks" lurking—the bubbles at the start of a new paradigm and the chasms at the end.

We've included notes that we've transcribed from Scully's talk below: 

• Cheap for a reason:"It turns out value investing doesn't work very well in technology stocks. There are a host of reasons why—but it boils down to, we think, a simple observation: Tech stocks get cheap for a reason, and it is generally best to heed the signal and move on. This tends to increase uncertainty, which creates a lot of short term volatility in technology stock prices. And many investors have chosen to focus on short-term trading strategies and try to capture that volatility as performance." 
• Macro doesn't matter:"We took a different path and sought to find out whether if it was possible to be a buy and hold investor in technology stocks. Our key insight was that tech stocks seem to be driven by innovation, not macro factors like the oil price, interest rates, or inflation."
• Analyze the S-curve:"This led us to think about technology investing as an S-curve, which is a concept you may know...As a new market opens up, there is often a horse race as competitors enter the market often with competing technologies. And the start of the automobile market, for example, there were three different technologies: electric, steam, and gasoline...
• Watch out for bubbles: "Bubbles often form at this stage as investor optimism gets ahead of reality. And a lot of promising companies fail. Ultimately, if the new market or trend is real, standards coalesce around the winner and it moves on to dominate the market in what we call 'a winner takes all' scenario. We don't exactly know why technology markets behave this way. Banks, pharma, and energy, for example, have all evolved as oligopolies. And this just doesn't seem to happen in tech. Is it a coincidence, for example, that the last four major antitrust investigations in this country were focused on technology companies—AT&T, IBM, Microsoft, and Google?"
• Watch out for 'chasms':"Winners in technology can dominate their markets for years, sometimes even decades. But trees do not grow to the sky. Growth evades and you have to watch out for chasms. Decline is often inevitable—Smartphones and software killed the feature phone. Nokia and BlackBerry failed to make the leap across." 
• Cycle of innovation:"In fact, this cycle of innovation has been going on for much longer than you might think. It dates back to at least the 1830s. That's a hundred years before Benjamin Graham ... This cycle of innovation turns out to be a pretty good way to think about what's happening in the tech industry for the last 50 years. Innovation has led to new markets opening up and new companies evolve to dominate them."
• Very few winners: "The key takeaway, and this is an important one, is that there are actually very few winners you'll encounter in your lifetime as an investor, especially in tech. The key is to find them and then buy and hold them for the longterm. And this in our view is one of the great ironies of technology investing because technology—the sector with the greatest volatility—is actually the sector offering some of the best longterm returns, especially for taxable investors who are penalized for short-term trading."
• How to pick tech stocks? "We would argue that there are two key skill required for success: The first is the ability to evaluate new markets or trends, 'Are they real? How big will a new market become in four or five years?' The second is the ability to analyze business models. That means thinking about a lot of the same things that the value guys do, 'Are there barriers to entry? Does this company have strong intellectual property?' These generally have a numerical expression in gross margin. Other key factors center around capital allocation and the strength of the management team and it's ability to execute...."
• Valuation is still critical, but it comes last in our process, not first.
• It's hard to be early/understand how big the trend is: Why do new markets or trends seem so obvious when we look at history but so darn hard when you look at the future? What's going on? There's three very big reasons—the first is it's hard to be early. Second, it isn't easy to assess the magnitude of the trend—is it big or small? Incumbents struggle with this the most even though they are the closest to the situation. Clayton Christensen calls this 'the innovator's dilemma.'"
• Wall Street gets it wrong:"We get paid a lot of money to think about these things on Wall Street and we can still be pretty darn clueless. Can you believe in 2009, the consensus earnings forecast for Apple only three years out was only $10? They earned $50! So how then do you spot the new trend?" 

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Coatue Management, Philippe Laffont's ~$3.5 billion tech-focused hedge fund is being investigated related to possible insider trading violations, a source tells Business Insider.

Coatue has disclosed to at least one of the expert networks that they are a client of that they are being investigated, but we have not confirmed whether or not the fund has informed their investors of the insider trading investigation. No one from Coatue has been charged with wrongdoing, to the best of our knowledge.

Coatue's General Counsel did not return a request for comment.

Coatue's founder, Philippe Laffont, is a '89 MIT grad (MS in Computer Science) who has summered on Nantucket for 30 years. He named the fund for the vacation spot; Coatue is a long barrier beach on Nantucket.

Laffont worked at Julian Robertson's Tiger Management until it closed and founded Coatue in 1999. These winter days, you'll probably find him in his Patagonia and corduroys, walking around the upper east side, where Coatue is located.

Suspicion first arose that Coatue would face a fate similar to Level Global and the others involved in the investigation when word got out that Laffont received John Kinnucan's infamous email warning his clients that the FBI had asked him to wear a wire.

Another reason to be suspicious that the fund will be similarly ensnared in the investigation is that Coatue uses or used Primary Global, the expert network firm that is in the center of the insider trading bust.

"A majority of the Tiger Cubs use Primary Global," says our source (a Tiger Cub is a term used to describe hedge funds whose managers were seeded by Tiger Management, Julian Robertson's behemoth). That alone doesn't mean much, he says, because most hedge funds use two or more expert networks (here's a list of the big ones), and Primary Global is probably one of them.

But in addition to Primary Global, Coatue is a client of the expert network firms Coleman Research Group, and Gerson Lehrman Group.

Our source used to work at an expert network much like Primary Global.

"Coatue will talk to anyone who seems like they have information that will prove their investment thesises and support their fundamental research," he says. The conversations they have with experts provide them with information that is not readily available to the retail investor.

Every month during 2009, analysts from Coatue spoke to a bare minimum of 3 consultants, for example, analysts from Coatue met with consultants on STEC, CREE, Juniper, and Dolby during 2009. 

Again, no one from Coatue has been charged with anything, as far as we know.

It may be helpful to read some of the helpful background information about why investment management firms use the networks that our source provided.

He says it's because if you don't, someone else will get the information before you, and you'll lose the opportunity to earn your investors coveted returns over 10%. But because the information received is not available to the retail investor, it might be considered insider information by a court. 

One Tiger Cub, Tiger Asia Management, is already being investigated by regulators. More Tiger Cubs will be investigated, says our source, and he's not surprised that Coatue is one that authorities are looking at.

He explains that expert networks often use consultants that have access to information about, for example, Apple's inventory data for a specific product or component. He provided the following example.

Say an expert network was in contact with Apple's warehouse inventory manager. Say the inventory manager was on a call with a hedge fund analyst, and the inventory manager told the analyst about a memo he received. The memo might have said to clear out the warehouse for a new product. And the new product, it could have turned out, was the iPhone 4. Information about the iPhone 4's new camera, obviously, is worth millions to someone who is investing in the company that makes the camera.

Even though the intent of the conversation was not to trade on Apple stock, the hedge fund analyst became privy to information that is not available to the average retail investor. This is just one of the ways that hedge fund analysts can attempt to gain an edge in understanding the demand in products and services in a company that they're interested in investing in, without talking to someone at the target company.

It's a stealth way to bend the rules, basically. In the coming months or years, regulators are going to have to decide whether or not this is legal.

One issue is that often these employees are unaware that the information that they have is inappropriate. And yet these are the employees that are, in exchange for several hundred dollars of their time, being asked for their expert knowledge and it is typically understood that they will have materially important information. And though it may not have been the initial intention of the call to obtain that exact information, it would be very easy for the material information to slip out to a hedge fund. So initially, they agree that they won't disclose nonpublic information, but the average Joe Schmo doesn't know what that means. Ultimately, it could spill out anyway, and the hedge fund might trade on it.

He didn't elaborate on which expert network or which funds might have received information like this. But it's now public that Primary Global consultant Walter Shimoon (now arrested) was paid just thousands of dollars to pass on to hedge fund managers potentially priceless information about the iPhone 4 camera that his employer, Flextronics, was helping Apple build.

He just said, "it's far from over."

The funds that have been implicated so far have been severely damaged by the scandal, For example:

• Investors in Diamondback, a fund raided in December by the FBI, want to pull at least $534 million from the fund.
• Redemptions at Level Global, another raided fund, are up to $750 million.
• Both Barai Capital and STG Capital closed because of the scandal.
• FrontPoint investors pulled $3 billion from the fund after news that its healthcare manager,Chip Skowron, was being investigated.

Here's what Coatue was holding as of Q4 2010 (dollar value x$1,000), according to the latest 13F:

ACME PACKET INC: $57,945  (1,527,278 SH)

AMAZON COM INC: $41,469   (264,032 SH)

AMERICAN SUPERCONDUCTOR CORP: $35,686   (1,147,464 SH)

AMERICAN TOWER CORP: $115,407     (2,251,404 SH)

APPLE INC: $431,061    (1,519,159 SH)

ARUBA NETWORKS INC: $37,144   (1,740,592 SH)

ASSURED GUARANTY LTD: $18,694     (1,092,565 SH)

BAIDU INC: $218,058     (2,124,911 SH)

CIENA CORP:  $50,317     (3,231,669 SH)  

CITRIX SYS INC: $267,199   (3,915,578 SH)

CONCUR TECHNOLOGIES INC: $26,738   (540,821 SH)

CROWN CASTLE INTL CORP: $167,996     (3,805,120 SH)

F5 NETWORKS INC:  $330,496   (3,183,660 SH)

GOOGLE INC:  $264,100  (502,292 SH)

INTERDIGITAL INC: $264  (8,900 SH)

INTERNATIONAL RECTIFIER CORP:  $46,117  (2,186,672 SH)

J2 GLOBAL COMMUNICATIONS INC : $214   (9,000 SH)

NETAPP INC: $189,361   (3,803,195 SH)

NETFLIX INC: $34,864 (215,000 SH)

NETLOGIC MICROSYSTEMS INC: $51,985  (1,884,888 SH)

NEUTRAL TANDEM INC: $9,227 (772,143 SH)

NUTRI SYS INC NEW: $11,828   (614,747 SH)

NVIDIA CORP: $4,254  (364,138 SH) 

PLANTRONICS INC NEW: $240  (7,100 SH)

QUALCOMM INC: $456,476  (10,114,139 SH)

SBA COMMUNICATIONS CORP: $75,819 (1,881,359 SH)

SEAGATE TECHNOLOGY PLC: $49,851  (4,233,616 SH)

SKECHERS U S A INC: $25,682 (1,093,323 SH)

SOLARWINDS INC: $22,275  (1,290,551 SH)

STEC INC: $6,029 (484,250 SH)

SUCCESSFACTORS INC: $15,382  (612,584 SH)     

TD AMERITRADE HLDG CORP: $63,339   (3,921,890 SH)

TECHTARGET INC: $1,939   (369,258 SH)

UTSTARCOM INC: $6,967  (3,210,529 SH)

VEECO INSTRS INC DEL : $10,461 (300,000 SH)

WESTERN DIGITAL CORP: $51,906   (1,828,305 SH)

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In case you needed a reminder about how incestuous the hedge fund and expert network world is, listen to this.

At some point around the time that Phillipe Laffont's $3.5 billion tech hedge fund Coatue Managementcame under investigation related to the insider trading case, the firm hired a new lawyer, according to Hedge Fund Alert.

And that lawyer, 38-year old Vincent Tortorella, a Dartmouth grad, came from Guidepoint Global, an expert network that's also been tied to the investigation.

(Sidenote: if you haven't been following along, you should know that expert networks -- here's a list of most of the big ones -- are really at the center of this whole investigation -- Guidepoint is just one of many. Read more about their role here.) 

Laffont is a genius for hiring this guy.

Not only has he handled the present insider trading scandal, but Tortorella is also an experienced federal prosecutor and white collar crime lawyer. (Before working at Guidepoint, he was a federal prosecutor with the U.S. Justice Department in Washington D.C., and earlier, with U.S. Attorneys Office for the Southern District of New York.)

And before that, he practiced white collar and commercial litigation at the New York office of Skadden, Arps, Slate, Meagher & Flom. 

So obviously, we jump to the conclusion that Tortorella was hired because of his experience handling the investigation for Guidepoint, and his experience working inside the office of the Feds.

The work he did for Guidepoint recently had to do with a Guidepoint expert, Dr. Yves Benhamou, who was arrested in conjunction with the insider trading probe in November because he provided information about a company called Human Genome Sciences to FrontPoint's Chip Skowrown.

As a result, Guidepoint has received a number of subpoenas. And a person familiar with Guidepoint told HFA: “[Tortorella's] life was pretty difficult for the last three months, responding to subpoenas on one side and irate clients on the other."

Now that Tortorella has taken on a similar role at Coatue, he will likely be the point man for the firm as it deals with its insider trading investigation.

Also interesting about Tortorella: his dad used to be a production department manager in Brooklyn for Leviton Manufacturing, a maker of electrical equipment.

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Netflix just reported terrible earnings and now their stock is plunging.

Who's left holding the bag? We can't tell for sure, because hedge funds are only required to report their long holdings, and not their shorts, to the SEC. However, these are the funds who reported holding the most Netflix stock (in shares of Netflix) to the SEC as of June 30th 2011.

John Thaler's JAT Capital - 2,617,691

John Griffin's Blue Ridge Capital - 1,115,000

Chase Coleman's Tiger Global - 1,030,000

Philippe Laffont's Coatue Management - 945,269 

Steve Mandel's Lone Pine - 639,421 

Thaler in particular might be hurt by the recent earnings because he recently took out a huge stake in Netflix. But of course, managers might hold stock for long-term purposes, and not be bothered by, or simply use this as an opportunity to buy more of Netflix.

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Hedge fund manager Philippe Laffont's driver, who is also a retired NYPD lieutenant, gunned down an armed drugstore robber yesterday in East Harlem as the suspect fled the pharmacy and fired on three police officers during a foot chase, the New York Post reports. 

From the Post: 

Thomas Barnes, 48, was filling his tank at the BP station on East 119th Street and First Avenue at around 11 a.m. when he saw gunman Rudolph Wyatt running from the store, and sprang into action.

He crouched behind his hedge-fund boss’ Mercedes SUV and squeezed off three shots, killing Wyatt, 23.

The trigger-happy thug — wanted on warrants for two other shootings — lay dead in a pool of blood on the sidewalk wearing a black stocking mask with a wad of stolen cash spilling out of his pocket, witnesses said.

Wyatt was a member of the Bloods gang, the report said.

Watch the video here.

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Philippe Laffont is a Tiger Cub, a wildly successful tech hedge fund manager, and an MIT grad. In another awesome interview with OneWire for their Open Door video series, he explains the path he took to get there.

In a few words — It wasn't typical.

After graduating from MIT, he began his career in management consulting at McKinsey & Co. Three years later, he met his wife-to-be and moved to Spain to work for her family. It was the boom days of the 90s and during this period, Laffont and his brother began buying technology stocks in their spare time.

“Our stocks were going up—we confused luck with skill,” Laffont recounts, “But nevertheless, it gave us the passion.” As a result, one year later he moved to New York to pursue a career in tech investing.

With no network in New York City, Laffont found it challenging to get hired, eventually taking a job working for free at a small mutual fund. By pure luck, Laffont wound up meeting with Julian Robertson very briefly through a friend of a friend.

“I went straight to the point…I said I want to work for you, I know about technology, and I want to pick tech names.” Robertson sent him on to interview, and he was hired by Tiger Management shortly thereafter. Eventually he started Coatue Management and the rest is history.

“The career advice I would have,” Laffont says, “is you need to do two things when you graduate. You need to do them both passionately. You need to do one thing passionately that is the obvious thing that you are supposed to do after you graduate…At the same time…you need to do one thing completely off the beaten path, but also passionately.”

Watch Part I of Laffont’s interview below and check back tomorrow for Part II of the interview, in which Laffont discusses his investment philosophy and how to get hired at a hedge fund today.

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Last week OneWire published their first interview with Philippe Laffont, Founder and CEO of Coatue Management.  In Part II of the interview, Laffont explains his investment philosophy, how he figures out great long and short positions, and how to get hired at a top hedge fund.

“For us, the key to investing is thinking…how can a company perform three to five years out?...Not focus so much from the short term, try to see the forest from the trees…Few people in the market think about the long term, and that’s our edge.”

But of course, he says, no one is right all the time. Laffont says he often finds it easier to prove something is wrong  (finding short positions) than it is to find great companies for long investments.

When asked what his firm looks for when hiring, Laffont emphasizes the importance of a strong education and solid on-the-job training.  He argues that once you’ve gained both these experiences, you will be prepared for all kinds of career paths.

“On Wall Street, there’s sort of a true and proven way to succeed when you’re young,” Laffont insists. “Go spend the first two to three years at Goldman Sachs, Morgan Stanley, McKinsey…an investment bank…Wall Street is a very competitive environment full of smart people, and if you can start your career [there], you’re going to learn a lot.  And you can choose to carry those skills, whether you want to work at a large corporation, whether you want to create your own small business, whether you want to go to Silicon Valley and create a tech company—it doesn’t matter.  But what a great training ground.”

So when can you break into a hedge fund?  Make sure you’ve got the basics down and you are ready to add value the minute you walk in the door.

“People don’t expect you to be prepared at JP Morgan on day one. But when you come to a small company, you have to be up and running because we don’t have as much time to train people; we expect them to already be productive.”

Watch Part II of Laffont’s interview below!  Or watch Part I here.

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Google's stock price broke $1,000 per share today.

The stock traded up more than 13% at around $1,007 today. It's now closer to $1,000. 

Here's a rundown of the ten hedge funds with the biggest stakes in the tech giant, according to the most recent 13F regulatory filing data compiled by Bloomberg.  (A few of these guys are Julian Robertson seeded "Tiger Cubs", too.) 

• Lone Pine (Stephen Mandel): 941,709 shares
• Lansdowne Partners: 936,328 shares
• Magellan Asset Manaegment: 740,683 shares
• Discovery Capital (Rob Citrone): 499,479 shares
• Coatue Management (Philippe Laffont): 432,663 shares
• Adage Capital Partners: 422,004 shares
• Cantillion Capital Management: 413,335 shares
• Soros Fund Management (George Soros): 396,953 shares
• First Eagle: 392,348 shares
• Columbus Circle Investors: 376,694 shares

Keep in mind, these were their stakes at the second quarter ended June 30.  It's unclear if they decided to buy, hold or sell since that time. 

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"Tiger Cub" hedge-fund manager Philippe Laffont, who runs Coatue Management, has decided to return $2 billion from its flagship fund to investors, CNBC's John Jannarone reports citing an investor letter.

Last month was ugly for the long/short technology-focused fund.

Coatue's flagship was down 9% because of losses in tech stocks, the report said. 

Laffont characterized last month's market volatility as "sudden and deep as some of the gut-wrenching dislocations of 2000-2002 and 2008-2009."

The fund's flagship fund has about $7 billion in assets under management. Laffont wrote that $5 billion in assets would be the right amount for the flagship, the report said.

The $2 billion is expected to be returned to investors on June 30.

Coatue invests in tech stocks such as Apple, Google, Facebook, LinkedIn, Netflix, Pandora and Yelp, the fund's most recent 13-F securities filing shows. 

Laffont's hedge fund was seeded by legendary fund manager Julian Robertson of Tiger Management nearly 15 years ago.

Coatue has recently been raising funds for a "hybrid fund" that will start investing hedge funds and private equity.  So if you look at the net, the total assets under management will be about the same. 

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Coatue Management, the $10 billion long/short equity hedge fund led by "Tiger Cub" Philippe Laffont, is one of the most prolific investors in technology companies.

Speaking at the MIT Sloan Investment Conference on Friday, David Scully, a partner and the chief marketing officer of Coatue, shared some insights into how the fund thinks about making its tech investments.

Both Scully and Laffont have taught a class at MIT on tech investing in the past. 

The fund's investment process isn't what you'd expect. In fact, it goes against some of the investing adages we're used to such as "buy low, sell high." 

"Perhaps the right way to think about this is not to buy low, but to buy high," Scully said. "Now I say that partly only tongue-in-cheek because it turns out that a great way to find new trends and potential winners is to look at stocks that are expensive. We like to call that 'dreaming the dream' and we believe this kind of optimism is essential, especially in the early stages of analysis."

Google, for example, dominates the search engine business in the US, Europe, and other markets. Companies like Google are rarely cheap and can often look expensive. Google went public in 2004 at $85, Scully noted. When it shot to $109 a share and was trading around 40-times consensus estimates some thought that it was expensive, he added. The stock has risen more than 1,200% since its debut.

During his presentation, Scully said that you want to first spot and analyze the new trends. Then, you try to identify the winner and figure out if that company has the business model and the intellectual property to capture the lion's share of the profits. Along the way, you want to be aware of the two "great white sharks" lurking—the bubbles at the start of a new paradigm and the chasms at the end.

We've included notes that we've transcribed from Scully's talk below: 

• Cheap for a reason:"It turns out value investing doesn't work very well in technology stocks. There are a host of reasons why—but it boils down to, we think, a simple observation: Tech stocks get cheap for a reason, and it is generally best to heed the signal and move on. This tends to increase uncertainty, which creates a lot of short term volatility in technology stock prices. And many investors have chosen to focus on short-term trading strategies and try to capture that volatility as performance." 
• Macro doesn't matter:"We took a different path and sought to find out whether if it was possible to be a buy and hold investor in technology stocks. Our key insight was that tech stocks seem to be driven by innovation, not macro factors like the oil price, interest rates, or inflation."
• Analyze the S-curve:"This led us to think about technology investing as an S-curve, which is a concept you may know...As a new market opens up, there is often a horse race as competitors enter the market often with competing technologies. And the start of the automobile market, for example, there were three different technologies: electric, steam, and gasoline...
• Watch out for bubbles: "Bubbles often form at this stage as investor optimism gets ahead of reality. And a lot of promising companies fail. Ultimately, if the new market or trend is real, standards coalesce around the winner and it moves on to dominate the market in what we call 'a winner takes all' scenario. We don't exactly know why technology markets behave this way. Banks, pharma, and energy, for example, have all evolved as oligopolies. And this just doesn't seem to happen in tech. Is it a coincidence, for example, that the last four major antitrust investigations in this country were focused on technology companies—AT&T, IBM, Microsoft, and Google?"
• Watch out for 'chasms':"Winners in technology can dominate their markets for years, sometimes even decades. But trees do not grow to the sky. Growth evades and you have to watch out for chasms. Decline is often inevitable—Smartphones and software killed the feature phone. Nokia and BlackBerry failed to make the leap across." 
• Cycle of innovation:"In fact, this cycle of innovation has been going on for much longer than you might think. It dates back to at least the 1830s. That's a hundred years before Benjamin Graham ... This cycle of innovation turns out to be a pretty good way to think about what's happening in the tech industry for the last 50 years. Innovation has led to new markets opening up and new companies evolve to dominate them."
• Very few winners: "The key takeaway, and this is an important one, is that there are actually very few winners you'll encounter in your lifetime as an investor, especially in tech. The key is to find them and then buy and hold them for the longterm. And this in our view is one of the great ironies of technology investing because technology—the sector with the greatest volatility—is actually the sector offering some of the best longterm returns, especially for taxable investors who are penalized for short-term trading."
• How to pick tech stocks? "We would argue that there are two key skill required for success: The first is the ability to evaluate new markets or trends, 'Are they real? How big will a new market become in four or five years?' The second is the ability to analyze business models. That means thinking about a lot of the same things that the value guys do, 'Are there barriers to entry? Does this company have strong intellectual property?' These generally have a numerical expression in gross margin. Other key factors center around capital allocation and the strength of the management team and it's ability to execute...."
• Valuation is still critical, but it comes last in our process, not first.
• It's hard to be early/understand how big the trend is: Why do new markets or trends seem so obvious when we look at history but so darn hard when you look at the future? What's going on? There's three very big reasons—the first is it's hard to be early. Second, it isn't easy to assess the magnitude of the trend—is it big or small? Incumbents struggle with this the most even though they are the closest to the situation. Clayton Christensen calls this 'the innovator's dilemma.'"
• Wall Street gets it wrong:"We get paid a lot of money to think about these things on Wall Street and we can still be pretty darn clueless. Can you believe in 2009, the consensus earnings forecast for Apple only three years out was only $10? They earned $50! So how then do you spot the new trend?" 

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NOW WATCH: Expanding Warren Buffett’s value investing approach to the socially responsible sector

• According to a report from The Information Thursday, prominent tech hedge fund Coatue Management announced it had raised a $700 million venture fund to back early-stage startups.
• The fund will reportedly be run by former Facebook VP Dan Rose, according to the report.
• Coatue Management is run by Philippe Laffont and his brother Thomas Laffont, and has spearheaded a data-centric approach to evaluating potential investments.
• The fund has already invested in Weights & Biases, Figma, AppZen, and Persona, according to the report.
• Click here for more BI Prime stories.

SoftBank isn't the only new kid on the block on Sand Hill Road. Outsized returns have caught the eyes of some of Silicon Valley's most successful hedge funds, and they're looking for skin in the game.

According to a report from The Information on Thursday, tech hedge fund Coatue Management has raised a $700 million venture fund to invest in early-stage tech companies.

Although typically the riskiest stage to invest in, the earlier an investor gets in, the larger the returns could be, which apparently appealed to Philippe Laffont and his brother Thomas Laffont, the founders of Coatue. The founders told The Information they were eager to get into prospective companies earlier as they continue to compete with larger, more well-known venture firms in Silicon Valley.

The early-stage fund will be run by former Facebook vice president Dan Rose, according to the report, and it's already invested in data-centric startups like Weights & Biases, Figma, AppZen, and Persona.

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The Laffont brothers have made a name for themselves by taking big bets on some of Silicon Valley's biggest names, albeit at later stages. Coatue Management had stakes in Snap, Uber, Lyft, Grab, and Airtable, to name a few of the firm's biggest hits. But as capital continues to flow into Silicon Valley, it helps to get in as early as possible.

In addition to the $17 billion under management, Coatue Management also benefits from a proprietary data analytics tool that helps guide investment, the Laffonts told The Information. According to the report, Coatue spends more than $30 million to purchase data for its algorithms, and nearly half of its investment team are engineers.

Coatue Management did not respond to Business Insider's request for comment.

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• Coatue, billionaire Philippe Laffont's firm, opened a quant fund last May to outside investors even as many larger quant funds were struggling in an increasingly competitive space.
• In the hyper-competitive space of quant funds, where the biggest managers like Two Sigma, D.E. Shaw, and Renaissance Technologies are investing more every year into new data streams and artificial intelligence, new players face an uphill battle.
• The fund, which sources say is closed, runs roughly $350 million now, and returned just under 2% in its first eight months of trading.
• In the fourth quarter of last year, the fund returned -1.2%.
• Visit Business Insider's homepage for more stories.

The first stretch of trading for Coatue's nascent quant fund hasn't seen much upside. 

In the hyper-competitive space of quant funds, where the biggest managers like Two Sigma, D.E. Shaw, and Renaissance Technologies are investing more every year into new data streams and artificial intelligence, new players face an uphill battle.

But Coatue's decades-long track record as a fundamental investor gave the new fund serious legitimacy. 

The fund, which began trading at the beginning of May, returned just under 2% for the year, and lost money — dropping 1.2% — in the fourth quarter, according to a document with performance numbers for the end of 2019 from one of the fund's investors seen by Business Insider.

The fund, which runs roughly $350 million and is closed to other investors, was originally hoping to raise $250 million, according to a Bloomberg piece last year, and is marketed as a mix of fundamental stock-picking Coatue is known for, and quant-fund-like data analysis.

In a difficult fund-raising environment, the fact Laffont was able to raise more than the firm was originally seeking shows how respected Coatue is — and how excited investors were for the new fund. 

"We envision a future where our data scientists and fundamental analysts sit side by side to formulate strong investment theses that are validated by data science," billionaire Coatue founder Philippe Laffont reportedly wrote to investors last year. Coatue is a part of billionaire hedge-fund founder Julian Robertson's network, and is known as a Tiger Cub because Laffont worked for Robertson.

The firm declined to comment when asked about its performance. 

Fellow Tiger Cub Maverick Capital also struggled to produce returns in its quant funds last year, losing money while the leveraged version of its fundamentally run flagship fund beat the surging stock market last year. Maverick also declined to comment on its quant products.

Big-time traditional quant players struggled last year too, as WorldQuant and AQR both had large layoffs to start the year, and even Ray Dalio's Bridgewater failed to make money. 

Coatue's human-run flagship bested the average hedge fund last year, recording 10% returns after losing money in a tough 2018. 

The mixing of fundamental and quantitative techniques, called quantamental, has been a popular hedge for stock-picking managers looking to diversify their products, but not there have been some notable struggles.

Balyasny, for instance, cut its 10-person quantamental team, known as Synthesis, last year after the group had only been trading for 12 months. 

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SEE ALSO: Maverick Capital's human stock pickers are shining, but quant strategies at Lee Ainslie's $8.8 billion fund are in the red and lagging their peers

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• Tiger Global, Maverick Capital, and Coatue all fell double-digits in March. Viking lost money as well.
• The Tiger Cubs, all founded by former members of Julian Robertson's Tiger Management's staff, focus on public equities; which were hit hard by the novel coronavirus pandemic.
• The average hedge fund fell nearly 6% in March, according to Hedge Fund Research's global index of hedge-fund strategies.
• Visit Business Insider's homepage for more stories.

Some of the biggest names in the hedge-fund game were not spared from the coronavirus selloff that tanked global markets. 

Coatue, Tiger Global, and Maverick all lost double-digits in March, sources told Business Insider, while Viking fell 5% for the month. Bloomberg first reported the Coatue and Viking losses. 

The funds, all run by billionaires, are considered Tiger Cubs, which is the first generation of funds to come from Tiger Management, the legendary hedge fund founded by Julian Roberson. 

Maverick's losses were the worst of the funds, with Lee Ainslie's fund down 11.7% for March and 13.6% for the year. The firm declined to comment.

In a note sent to investors right as the coronavirus was beginning to spread to the US, Ainslie had said his plan was to take advantage of the volatility in the markets and buy up stocks of companies he liked at a discount. 

Tiger Global, the fund founded by Chase Coleman that invests heavily in both public and private markets, fell 10.8% in March and is down 5.8% for the year. The firm declined to comment.

Bloomberg reported that Philippe Laffont's Coatue dropped 10% in March and is down 6% for the year. Viking's losses are at 2% for the year, after the 5% drop in March, according to Bloomberg. 

The average hedge fund fell nearly 6% in March, according to Hedge Fund Research's global index of strategies, and is down 6.85% for the year.

Stephen Mandel Jr.'s Lone Pine meanwhile lost tens of millions on an investment into Luckin Coffee, filings showed, after the China-based company's stock dropped 80% on the news that its COO falsified about $310 million of sales. Lone Pine declined to comment on Luckin and declined to provide a performance update.

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• Billionaire Philippe Laffont's Coatue Management is returning outside capital in the firm's quant fund to investors, sources tell Business Insider.
• The fund, started roughly a year ago, ran around $350 million, but pulled back its exposure from the markets significantly in March and April.
• A source close to the firm tells Business Insider it plans to continue trading the strategy with internal money, and hopes to eventually reopen it to outside investors again.
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Coatue Management's year-long experiment in quant investing is going back to the drawing board. 

Billionaire Philippe Laffont's $350 million quant fund is returning outside capital to investors, sources tell Business Insider. The fund, which began trading outside capital in May of last year, pulled back significantly from the market earlier this year as the coronavirus pandemic sent global markets reeling. 

A source close to the firm tells Business Insider that the fund will still be running with internal capital, with the hopes of re-opening the strategy to outside investors again in the future.

Coatue declined to comment on how much internal money the strategy will continue to run.

The Coatue quant fund relies on alternative-data feeds to make its investing decisions, and the pandemic skewed inputs in a way that confused the investing program, Business Insider previously reported. 

Even prior to the pandemic, the fund was not producing top-tier returns; the fund lost money in the fourth quarter of last year as equity markets soared. 

The fund was led by the firm's well-respected data science team, and was able to raise significant money for a first-time quant player. Bloomberg reported last year that the team had 30 people, and planned to expand.

The current team headcount, according to a source close to the firm, is more than 25.

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The environment for a new quant fund couldn't have been tougher. With a soaring cost for data and an increasingly competitive quant space squeezing out once-easy gains, the fund then ran into the pandemic, which slammed several long-time quant players like Bridgewater, Point72's Cubist, Renaissance Technologies, and Schonfeld.

Several quants described it as worse than 2007's "Quant Quake" that decimated Goldman's quant investing unit. Credit Suisse shut down the firm's $519 million QT Fund in late April because of pandemic-related losses.

Fellow Tiger Cub Valinor Management told vendors earlier this week that it is winding down its $2.5 billion operation. 

Read more: 

• $2.5 billion Tiger Cub Valinor Management is closing — it's the first multi-billion-dollar hedge fund to wind down since the pandemic started
• The world's biggest hedge funds like Bridgewater are blending quantitative and fundamental trading. Here's why it's gaining hype on Wall Street.

SEE ALSO: Coatue's $350 million quant hedge fund pulled money out of the market in a move that exposes the dangers of data-driven trades

SEE ALSO: Worse than the 2007 'Quant Quake': Huge quant names like Schonfeld and Bridgewater are getting slammed as market chaos blows up computer-driven trades

SEE ALSO: Credit Suisse just shut down its $519 million computer-run QT Fund after a month from hell for quants

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Coatue — the long-running hedge fund of billionaire Philippe Laffont that manages $25.8 billion in assets — has lost one of its top people in charge of buying the data many consider to be the lifeblood of equity-focused hedge funds.

Dave Schwartz, a vice president focused on data acquisition and strategy, is no longer at the firm, sources tell Business Insider. It is not clear if Schwartz was dismissed by Laffont or if he left on his own accord. Coatue declined to comment, while Schwartz did not immediately return requests for comment.  

Schwartz's role, which nearly all funds Coatue's size now have, is to vet and bring in alternative data streams that will help portfolio managers and analysts project market moves before more traditional numbers, like earnings and jobs reports, are released. The multi-billion alternative data space has been even more important during the ongoing pandemic, as investors are scouring data feeds for a sign of life returning to normal. 

Prior to joining Coatue in late 2018, Schwartz spent nearly three years in a similar role at Ken Griffin's Citadel, according to his LinkedIn, and also worked at ITG.

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Coatue's data science team, led by Alex Izydorcyzk, is well-regarded in the industry, with more than two dozen people on it. But it ran into some speed bumps this year when the team's young quant fund was unable to keep up with the market volatility caused by the coronavirus in the spring. 

The roughly $350 million quant fund relied on its data-driven algorithm to make its investment calls, and the pandemic skewed many of the feeds it relied on. For instance, e-commerce data, which spiked in the spring when physical store locations closed, only showed part of the story of the pandemic reality — sending signals to buy stock in struggling retailers whose physical stores were shut to customers. 

The fund, which lost money in the fourth quarter of last year, pulled back significantly from the market in the months after the pandemic hit, and then in June Coatue closed it altogether to investors and returned its outside capital.

Have a tip or know more about Coatue's quant efforts? Reach the authors directly at bsaacks@businessinsider.com or amorrell@businessinsider.com. To message them via encrypted chat, visit their author pages. 

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SEE ALSO: Coatue is returning all outside capital in its $350 million quant fund after computer-driven trades broke down in extreme market volatility

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A rising star from billionaire Philippe Laffont's Coatue is set to become the latest addition to the extensive Tiger Management family tree.  

Peter Zhou, a former senior managing director at Coatue, is launching his own fund, according to several sources with knowledge of the situation. He has at least $300 million in commitments already, sources say.

It's unclear if the new venture has a name; Zhou declined to comment when reached by Business Insider, and Coatue declined to comment as well. 

Zhou, who spent nearly a decade at Coatue before leaving earlier this year, was considered a rising star at Laffont's firm. As a fundamental investor at tech-focused Coatue, he made Forbes' 30-under-30 list in 2015 as a 28-year-old, and the magazine noted he was a specialist in hardware technology stocks. 

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 His current, self-given job title on his LinkedIn page is "generalist tech investor." Prior to joining Coatue, Zhou worked at Blackstone for three years after a summer stint at Morgan Stanley, according to his LinkedIn bio. A Harvard grad, Zhou was born in Shanghai but grew up in Minneapolis, according to Forbes. 

The launch environment continues to be tricky, as the pandemic has made it difficult for investors to meet with potential backers; Hedge Fund Research found that more than double the number of the funds have closed through the first half of this year than have launched, with 213 launched and 483 shut down. 

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Even before the virus hit though, new funds were struggling to get off the ground, thanks to the rising cost of technology and data for new managers trying to break into an already crowded space. The last year more funds were launched than liquidated was 2014, according to Hedge Fund Research.

Zhou will be another addition to Coatue's branch of the extended Tiger Management family. Unlike fellow Tiger Cubs like Viking Global and Lone Pine, Coatue has a limited number of alumni running their own firms currently, according to a Business Insider review. The only active funds founded by former Coatue employees are Scott Stevens' Grays Peak Capital and Hong Kong-based Sylebra Capital Management run by Daniel Gibson and Jeff Fieler. 

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SEE ALSO: A new hedge fund run by a one-time minor league baseball player is set to spin off from billionaire Leon Cooperman's Omega Advisors

SEE ALSO: $26 billion Coatue is down one of its top alternative-data buyers after the firm's quant fund that relied heavily on the unique datasets was rocked by market volatility earlier this year

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