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Tiger grand-cub Eduardo Costa lays out how retail investors have changed his $300 million hedge fund's investment approach

Business Insider logo Business Insider 7/9/2021 bsaacks@businessinsider.com (Bradley Saacks)
a man wearing a suit and tie: Eduardo Costa founded Calixto in 2014. Calixto Global Investors © Provided by Business Insider Eduardo Costa founded Calixto in 2014. Calixto Global Investors
  • Eduardo Costa, who worked at Chris Shumway's eponymous manager, runs Calixto Global Investors.
  • He walked Insider through how he thinks about investing in the WallStreetBets era.
  • His fund is up 3.9% this year through June, a source familiar told Insider.
  • See more stories on Insider's business page.

The retail-trading frenzy around the bankrupt car-rental company Hertz last summer might have made a few hedge-fund managers laugh, but the January drama starring Reddit traders, GameStop, and big-name funds showed the $3 trillion-plus industry how serious such trading could be.

In response to the coordinated short squeeze on Melvin Capital and other hedge funds, several managers have tweaked how they do things, including Melvin and Dan Sundheim's D1 Capital, both of which suffered big losses in January. The managers have changed how they short and what vehicles they use to take bets against public companies.

At Calixto Global Investors in Coral Gables, Florida, there is a strong appreciation for what the Reddit crowd can do.

"The fact of the matter is we have to be aware of the most popular meme stocks now," said Eduardo Costa, who founded Calixto in 2014 with $25 million and has since grown the firm to more than $300 million.

Costa said the WallStreetBets crowd was "a new force that's happening in the market" and had forced him to change the way he shorts companies, mostly smaller positions to make sure he doesn't suffer the same fate as Melvin - which Calixto came close to.

"We were short some of these things and covered quickly at prices we thought were ridiculous - and then they doubled and tripled in price," he said, without naming specific tickers. The decision to take smaller short positions ensures that a single wrong bet doesn't lead to a catastrophic loss.

It's another example of the new respect being given to what professional investors used to refer as dumb money. Hedge funds are tracking conversations on forums like WallStreetBets the same way they track data on sales and shipping patterns. Short sellers believe the important function they serve in the markets will be eliminated by day traders who want to send every name to the moon.

Calixto can certainly appreciate the frustrations of short sellers. Costa said his shop viewed shorting as a way to make profits, not just hedge long bets.

Costa said the fund had so far found success in geographies outside the US, like Japan and China, and invested mostly in consumer and technology, media, and telecom sectors.

A person familiar with the firm's results told Insider the fund was up 3.9% through June after returning 3.2% to investors last month. Costa said the manager used the MSCI World Index as a benchmark, which has returned nearly 13% through June. In 2020, the fund returned 47%, the source told Insider.

Costa said he hoped to grow the fund - which has a five-person investing team, including himself - to be between $1 billion and $2 billion. It has expanded recently into private investing, with a deal involving a Chinese internet company that he declined to name.

Private investing has spread across the hedge-fund space, most notably among the disciples of Tiger Management founder Julian Robertson. Costa is a part of the Tiger family, having worked as an analyst for former Tiger Management analyst Chris Shumway's eponymous firm and as the director of research for John Thaler's JAT Capital.

Costa is hyperfocused on fundamentals as companies come out of the pandemic, especially in tech companies whose "fundamentals were accelerated," he said. But the advent of retail traders' power has warped many of the long-standing rules investors like Costa have lived by.

"We're not going to do well in a situation where the outcome has no bearings on the fundamentals of the business," he said.

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