Dear Partners and Friends,

Well, we’re six months into “SaaS-pocalypse“, and it looks like the software incumbents are still standing. So far at least, the disruption that the market was fearing hasn’t appeared in the reported results for most businesses.

That’s not to say AI isn’t starting to be disruptive. My wife has taken to asking how my girlfriend is doing – she finds me most nights at 11pm engrossed in my phone, texting “Claude-ia,” asking her to explain the world to me. The disruption is real – it just started with my wife’s sleep.

And for investors, there’s no doubt AI will change the world, and how companies do business. It’s more a question of “how quickly”, and who will capture the value.

What we’re seeing, I think, is simply the market coming around to the idea that disruption of this scale doesn’t happen as fast as people first imagined.

For example, remember that viral 2028 thought experiment that made the rounds and sparked fear in the markets earlier this year (LINK)? The one imagining a world where DoorDash and the other marketplaces lose their pricing power, as our personal AI agents quickly comparison-shop dozens of vibe coded competing sites on our behalf?

At a high level, I suspect the piece is directionally right. But it just doesn’t feel like a world that’s only two years away. We’re still ordering pad thai the old fashioned way, and DoorDash stock has recovered to where it traded before the “SaaS-pocalypse” narrative took hold…

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Dear Partners and Friends,

It’s been a challenging few months for the portfolio. The market is wrestling with two concerns simultaneously: potential AI disruption to incumbent business models, and slowing global growth driven by the Iran War and resulting spike in energy prices.

As a result, businesses seen as either digitally exposed or economically sensitive are being heavily punished. Internet and fintech businesses – which are the majority of our portfolio – happen to sit squarely in both camps, leading to our recent under-performance.

That said, while drawdowns are never pleasant, they’re a normal part of the investment journey (see below). In fact, our portfolio seems to experience 20 – 30% declines at some point in almost every calendar year, typically when external shocks negatively impact market sentiment. It’s to be expected for a concentrated, tech-heavy portfolio like ours. And we’ve also lived through enough of these episodes to recognize them for what they are – temporary. Historically, the portfolio recovers once the macro clouds disperse.

**

While our corner of the market has been sold, capital has been rotating aggressively in the opposite direction – into anything tied to the AI infrastructure buildout.

Even a war hasn’t been enough to stop the nearly trillion dollars in annual spending being funneled from the mega cap technology companies to the “picks & shovels” semiconductor and hardware makers around the world.

This has turned once commoditized chip makers into coveted “bottlenecks” in the AI-trade. Semiconductors (SOXX) are up +76% YTD and continue to propel the majority of the market’s gains year-to-date. The memory companies (like Micron and SK Hynix), have been the poster children of the move, going parabolic with +100% moves in the last few weeks alone (and over +700% in the past year).

To be fair, earnings have grown tremendously, as these companies push through price increases and margin expansion to meet insatiable demand. But has the industry really transformed from a notoriously cyclical industry into a secular grower with pricing power? Has TSMC’s restraint in building new capacity really prevented us from a bubble this time? And will end-user demand ramp quick enough to justify all of this infrastructure once its built?…

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Dear Partners and Friends,

2025 was a clear reminder of just how difficult it is to predict markets over the short term. If you had been told that in just a few months, the world’s largest economy would ignite a global trade war, strike Iran’s nuclear sites, capture a foreign president, and attempt to coerce Europe to sell Greenland, you’d probably expect the markets to fall.

Yet the opposite happened. Markets showed broad-based strength, underscoring both their resilience and their unexpected nature. U.S. equities posted double-digit gains. But international markets performed even better, with Korea’s Kospi and its remarkable 76% surge taking the crown.

Notably, this marked the first time since 2017 that international stocks outpaced their U.S. counterparts.

A couple quarters ago, I wrote: “This whole [trade war] saga highlighted just how erratic and unreliable a partner the US has become, to its global peers. US assets have typically commanded a premium due to its rule-of-law and perceived safety of assets. But if the US government is behaving like an emerging market anyways, why not invest closer to home, where valuations are lower. (LINK)”

I think this aged rather well: the MSCI Emerging Markets Index outperformed the S&P 500 by roughly 16%, nearly doubling its return. I suspect this dynamic will likely persist, with international markets continuing to outpace U.S. equities – driven not only by stark valuation disparities, but also by a growing recognition that the U.S. is a less stable investment environment than it’s been historically…

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Dear Partners and Friends,

The markets continued to power upwards, as AI excitement raged on. If I were to title the recent quarter, it’d be called: “Hot AI Summer: When Your GPUs Run Hotter Than Your IRR” (sorry, thank ChatGPT for that one).

More recently though, skepticism is seeping into the markets, with the popular debate now being whether we’re in an AI bubble or not (in my view, it’s still too hard to know)3 .

But regardless of the market’s fickle behavior, one trend is clear. Whether participants in this surge of AI infrastructure investment become fabulously wealthy, or if they end up involuntary benefactors to the advancement of human progress – AI technology is here to stay.

Instead of debating “bubble or not”, I think our time is better spent contemplating what the world looks like after the current phase of AI infrastructure investment. And especially, how our portfolio can take advantage in the “deployment” stage of development.

For example, in a world where AI permeates everything, where will the biggest profit pools be? Will it be the foundational LLMs and chip-manufacturers powering the industry’s backbone? Or the companies who own the customer relationships and utilize AI to enhance operational efficiency? Will it be the AI applications that enable this business transformation? Or will these benefits ultimately pass onto the consumer, who utilize their newfound time & resources to spend on real-world leisure activities?

While the world throws money at the sector, fundamental data becomes distorted, and it can be hard to see past the fog4 . But one safe bet, is that companies that meet existing human needs through new technology will inevitably gain significant value.

For example, online shopping evolved from physical stores, which replaced town markets, and which was an improvement from nomadic traders and bartering. In every stage, new business models that embraced “technology” to offer customers greater value, took profits from the old.

Human needs don’t change – but the technology to meet those needs more efficiently, does.

Historically, we’ve made some of our best investments in companies that leveraged platform changes in technology. As such, we’re eager to see which new businesses will emerge in coming years…

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Dear Partners and Friends,

Our portfolio had a strong quarter, as geopolitical anxiety subsided the past few months.

The markets quickly realized that Trump’s initial tariff threats were simply an opening salvo in the “Art of the Deal”– as newly negotiated rates are coming in at just half what was proposed a few months ago. Markets let out a sigh of relief.

As an unintended consequence, emerging market assets are finally catching a bid. This whole saga highlighted just how erratic and unreliable a partner the US has become, to its global peers. US assets have typically commanded a premium due to its rule-of-law and perceived safety of assets. But if the US government is behaving like an emerging market anyways, why not invest closer to home, where valuations are lower?

The MSCI Emerging Markets index is out performing the S&P 500 by ~9% year-to-date. If this continues, it will be the first time emerging markets have outperformed the US since 2017.

**

During these last few months, I’ve also had more conversations with investors at other investment firms – part of searching for new opportunities shaken out by recent market volatility.

While the conversations have been fruitful, I couldn’t help but notice just how often other investors talk about their “long-term” investments as measured in quarters, nowadays. Investing with a 3-year outlook (let alone owning companies for 5 or 10 years, like we aim to do) is starting to feel like a relic of the past…

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Dear Partners and Friends,

I think the last few months are best captured by the quote, “It was over before I knew it had begun…”

The markets started the year off exuberantly, excited about the potential of AI and the new US administration’s more business-friendly stance. Even Chinese equities (long in investors’ “doghouse”) caught a bid after Deepseek’s release.

But alas, the excitement didn’t last. Even before the tariff announcements, there was already anxiety about AI over-capacity. And on April 2^nd, the US unleashed a bombshell – unprecedented tariffs on its global trading partners. These further triggered fears of economic, inflationary, and political fallout.

The market reacted sharply, with the S&P 500 declining -14% in just three days (~-20% from its peak). But in another twist, equities then quickly recovered over the next few weeks, as if nothing changed.

As for the actual tariff rates, the White House’s announcements have been just as fickle. After a few days of markets throwing a tantrum, the administration blinked and paused most tariffs. The original import tariffs on China (one of the US’s largest trading partners) started at 54%, escalated to 145%, and then was negotiated down to 30%. All this happened within six weeks.

If there’s anything to be learned, it’s that Trump 2.0 is shaping up to be just as unpredictable as Trump 1.0. And maybe that’s the point… I don’t pretend to know what’s in store the next few years. Except to brace for a market that’s more erratic than usual…

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It was also a good year for the portfolio, with our core positions powering the bulk of our returns. The market began recognizing what we’ve been calling out for a while – that Sea Ltd will be able to out-compete its rivals and capture the majority of ecommerce spend in Southeast Asia. And that Applovin’s true value lies in its advertising network (i.e. the algorithm), which is competitively advantaged by its breadth of data.

Importantly, these returns are simply the output of “buy” decisions made many years ago. And subsequently, our judgement to hold and even “double-down” during the depths of market pessimism in 2022 and 2023. These turbulent times laid the foundation for not just last year’s returns, but I suspect also many more going forward.

**

During the fourth quarter, the portfolio rose +19.4% compared to +2.4% for the S&P 500 and -0.8% for the MSCI World indices. This brings our long-term returns to +14.1% annualized after fees, versus +13.0% and +9.2% for the S&P 500 and MSCI World, respectively. Our partners have made 3.8x on their capital, since inception.

We’re proud to achieve this long-term outperformance, while looking very different than our benchmarks. US equities have strongly outperformed over the last 10 years, and yet we’ve historically found some of our best investments abroad. In fact, ~56% of our assets are now invested in Asia, ~34% in North America, and ~6% in Latin America. The remainder is in cash...

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We have a global portfolio, that I believe is well prepared to handle (and perhaps even benefit from) whatever direction the world heads next.

For example, it looks like we’ll finally have a crypto regulatory framework in the US, which benefits our long-held Coinbase investment. Or if geopolitical tensions continue to heat up, I anticipate SE Asia may be the biggest beneficiary, as both the US and China compete to influence and invest in the region.

Even for Chinese companies looking to sell into the US market (which at first instinct, is the most precarious position to be in), I suspect a mutual solution will be worked out in time.

Particularly, it appears the Tiktok US ban is going to be reversed. And Chinese consumer brands continue going global at an accelerating pace – the likes of Luckin, Miniso, HeyTea, Haidilao, Jiumaojiu, Li-Ning, and others. Politics aside, American consumers still want delicious food and good products. Even BYD, which has been in the spotlight recently, may find a way forward by following the path of Toyota in the 1980’s.

Appealing consumer products will always find customers, and market forces tend to be stronger than geopolitics after all. As long as the rules are clear, I believe innovative companies will always find ways to survive and thrive...

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Since the quarter ended though, we’ve seen volatility return to the markets these past few weeks. It seems that the market is becoming more aware of the stretched valuations in the most popular AI-related stocks, which have propelled the majority of this year’s index gains. There are also renewed fears that the US economy is starting soften, with some arguing that interest rates have remained too high, for too long.

It’s all but certain that the Fed is going to cut interest rates soon. It’s no longer a debate of if or when, but of how much. Historically, periods of declining interest rates have been good for international, small cap, and long-duration assets, as lower government yields push investors to seek returns elsewhere and lower the cost of funding for businesses.

Having said that, while it’s useful to be aware of the macro environment we’re in, it’s extremely hard to make money off of. Not only is it tough to predict macroeconomic policy, but even harder to predict their subsequent effect on individual stock prices.

As such, our investment process has always been bottoms-up driven, simply using periods of such volatility as time to go shopping. We’ve already begun buying a new position – one we’ve followed for several years – and may continue adding if the market volatility continues. We’ll provide more updates in time, if or when the investment becomes a more substantial part of the portfolio...

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Sea Ltd is gaining market share in Southeast Asia (despite the competitive intensity from TikTok), Applovin is taking advertising dollars from Unity and their operational missteps, New Oriental is accelerating its tutoring center openings as smaller competitors went bankrupt, and Coinbase is effectively now the last (and most trusted) crypto exchange left standing.

As their smaller competitors focus on fixing their business models and balance sheets, these market leading companies are taking the opportunity to step on the gas pedal and accelerate growth...

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What’s more encouraging is that we’re starting to see early signals of economic & sector-specific improvements. A few weeks ago, the Fed signaled that they believe interest rates have reached their peak for this cycle. Now the question is just when exactly to begin cutting rates in 2024. The direction is clear, but the magnitude and timing are not.

Elsewhere, we’re also starting to see early signs of ecommerce penetration increasing again, after three years of stagnant growth. In the early days of Covid, many (including myself) thought that ecommerce penetration would permanently “step-up” as Covid formed new consumer habits, and then continue growing at its prior rate...

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But our companies have started seeing a more stable environment over the last few months. The “cost optimization” phase is almost finished, which is starting to bear fruit in the form of leaner business models (i.e., lower fixed costs), and thus improving margins as sales recover. As this period of downsizing comes to an end, the focus is shifting towards growth investments that will hopefully pay off over the next few years.

The macro environment is providing support as well, as the Fed’s aggressive interest rate hikes are starting to take hold and inflation is softening. Over the last few weeks, the market has begun pricing in a scenario of these rate hikes being finished for this cycle, and rates to start coming down later next year...

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The US economy is still growing in the low single-digits, consumers are spending, and employment remains strong. With heightened confidence that the US is going to avoid another recession, the equity markets have been recovering.

Meanwhile in Asia, the economic picture is more mixed. Originally, China’s economy remained resilient during the height of Covid, as the country essentially shut its borders over the last few years to prevent the spread of Covid, and the domestic economy was insulated from the global situation.

However as the country reopened up late last year, these economic consequences are just now starting to catch-up. China has so far avoided massive stimulus measures, fearing the same consequences of run-away inflation that the West has faced the past two years.

But as the economy remains in the doldrums, the government has started to shift its stance the past few weeks, with the economy’s health clearly the government’s top priority and more policy support expected for this fall. As such, after a volatile year, Chinese equities are beginning to recover as well...

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Our companies were among the first to feel these economic changes, and thus were also the first to act. Over the past year, almost every company within our portfolio has undergone some form of restructuring – whether it was curtailing new investments to focus on their core business, raising prices to accelerate the return on their prior investments, or downsizing operating budgets to only spend on the most efficient services.

The silver lining is that since they embarked upon these initiatives early on, restructuring efforts for the universe of companies we tend to focus on, are basically complete...

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While our portfolio finished the fourth quarter in positive territory (and continuing into 2023), it masks several of noteworthy events – from the China’s National Party Congress sparking panic in Chinese equities, to a drastic sentiment-turn just a few weeks later when China ended zero-Covid, to several frauds and weak-players being exposed in the crypto ecosystem, to decades-high inflation finally turning a corner.

Last quarter I mentioned that it felt like the macro-driven valuation compression was largely finished, and going forward it would be up to our individual companies to execute and prove the durability & trajectory of their future earnings. I have even higher confidence in this now, as we’re finally starting to witness meaningful dispersion among structural-winners within our universe vs. their weaker counterparts.

Typically these environments are best for stock-picking – especially when it’s following a large market dislocation, where the market sentiment is still fragile, many stocks have gotten “thrown out with the bathwater”, and inefficiencies abound...

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However, we’re growing cautiously optimistic, as it feels like we’re getting closer to the end of this difficult period. From our perspective, valuation compression seems to be mostly finished within our investment universe. Markets have repriced share prices sufficiently (and sometimes overly so, as we’ll illustrate below), to account for the substantial interest rates increase this year + an expected recession in 2023.

Going forward, it’s going to be up to our companies to execute and prove to investors that their future earnings trajectories remain strong. As such, the future direction of our portfolio values should be more within our & our companies’ control, versus when we experienced broad-based valuation-driven selling earlier in the year.

This doesn’t mean we’re out of the woods just yet. Markets will likely remain volatile over the next year, until the macro picture stabilizes. We’re still seeing high volatility even in the last few weeks. For example, Chinese ADRs experienced a one-day -20% drop on October 24th after China’s National Congress, as foreign capital flooded out of the market. One of our investments, Pinduoduo (which we plan to publish our write-up on in the near future), experienced a -35% draw-down that day, only to rebound +80% three weeks later. Sea Ltd reported earnings last week, after which the share price rebounded +36% in a single day.

These types of price moves aren’t normal – they’re symptomatic of a market that remains “on edge” and is struggling to price these shares accurately given the mixed hurricane of macro and company-specific datapoints. It’s an interesting time in the markets, and we will try to tactically take advantage of this volatility where we can...

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While the recent stability of our portfolio these last three months may provide hope that we may have already seen the worst, it’s likely that volatility will continue to be high for the rest of the year. The macro backdrop remains volatile, so it’s hard for investors to deploy capital in this environment – with recent statistics showing investor’s willingness to deploy capital remaining at record lows. Afterall, stock prices fluctuate with investor flows / demand in the short term.

However as the economic clouds eventually dissipate, I’m certain we’ll see demand once again for our companies’ stocks.

During this time period, it’s been encouraging watching our companies continuing to execute and grow. Some are gobbling up market-share as competitors go bankrupt (or at least financially constrained), while also accelerating their timeline to profitability. When this economic downturn eventually ends, we expect them to emerge in an even stronger position on the other side. This is what really matters for valuations, over the long-run...

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This macro uncertainty, combined with rapidly rising interest rate expectations have had a dramatic impact on the market valuations of our portfolio companies, along with the rest of the ecommerce, fintech, gaming, consumer internet and emerging markets sectors we operate in more broadly.

To illustrate the carnage out there, the Hang Seng Tech index (which tracks the largest technology companies listed in Hong Kong) is down -65% since its peak last year. Ecommerce stocks (as measured by the ProShares Online Retail ETF) are down -62%, and Fintech stocks (as measured by the Global X FinTech ETF) are down -56%. Looking at the NASDAQ, over 50% of the index companies are now down more than -50% from their highs. Even Amazon, a blue-chip of the tech universe is down over -40% from its highs last year.

This isn’t a normal draw-down in our sector. The markets are already trading similarly to what we saw in 2001 and 2008… the amount of fear that’s out there is chilling.

As another example of the craziness out there, you can even find growing, profitable companies, trading below net cash (see HUYA at a negative -$800M valuation, although there are plenty of other examples) in the Chinese Internet sector. You don’t see these types of extreme situations in healthy markets....

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Where our portfolio will be in the next five to ten years, will be more dependent upon whether emerging markets consumers will continue to shift purchasing habits from offline to online and our companies can remain the primary ecommerce destination, or whether US consumers will continue to prefer purchasing their cars online in a low-friction manner, or whether the crypto ecosystem will continue to expand and become ingrained in mainstream consumer’s lives. In a decade, it certainly won’t make much of a difference to our portfolio’s success, whether short-term interest rates are at 0% or 3%.

While a drastic shift in the interest rate environment is painful in the short-term for our companies (which tend to be earlier in their lifecycles, and won’t realize profits until further out in the future) and thus pressures the valuation multiples the market places on them, none of this changes the earnings / fundamental trajectory component for our businesses. And we certainly weren’t underwriting our investments expecting today’s low interest rates to persist when we purchased them either.

In effect, while rising interest rates will affect the discount rate the market places on our business’ future cash flows, we believe that the exponential growth in this cash flow profile will more than offset the valuation headwind over time.

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I sometimes tell others that running an investment firm like Hayden, is like going on an expedition… you may have a vague goal of what you hope to find, and it may take years before discovering anything new (if at all). The exact journey, timeline, tools and skillset you’ll need, the unexpected discoveries you find along the way – you just don’t know, until you embark.

Similarly, to finance the expedition, you’ll likely need to find aligned backers, who chosen correctly, will also make the journey is much more fun. These partners first must share the foundational vision for how and why we’re all doing this in the first place (i.e. they can’t create friction to the process), and it requires a certain adventurous type. But if that’s in place, then they tend to be emotionally invested in the outcome themselves, and thus want to provide the resources for the vehicles, teammates, recommendations to resources, and even act as “tour guides” at certain points along our journey. By cultivating such partners, our odds of succeeding are increased due to the quality of resources and manpower, which benefits everyone involved.

We never know where our own journey’s going to take us – which is why despite our specialization in consumer internet in US & Asia, our official mandate remains wide-open. We don’t know where the greatest opportunities will lie in 10 – 20 years. We can only prepare ourselves with the skillsets to be ready for wherever the road may take us.

For example, our newest investment in Coinbase (discussed below), was in-line with this mentality. We were open-minded enough to recognize a unique business model that fit squarely among our existing skillsets (a marketplace / exchange business model, that’s also at the forefront of cultural change), despite operating in a land foreign to us (the crypto landscape required new learnings on our end, aided by some help from some expert “tour guides” in our network).

As we cross $100 million in AUM, I’m very proud of both our internal and external partners, who have helped us on this expedition over the years with their open-mindedness and desire to succeed together. Hopefully we’re just starting, and will have many more journeys (i.e. new investments) to make together over the years...

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