A look at Hedonova

Today we’re taking a look at Hedonova, an alternative investment fund with some interesting strategies and allocations.

As we get closer to launching our own fund, we feel it’s important to analyze existing offerings impartially, to better understand the pros & cons of different alternative investing strategies.

Let’s go!

Editor’s Note: This is an independent analysis of Hedonova, who agreed to give us an unconstrained look at their investment fund and operations. Hedonova is a sponsor of Alts, but our research is neutral and unbiased. We received no compensation for this issue. All opinions and content are our own. This should not be considered financial advice.

What is Hedonova?

Hedonova is like a mutual fund for alternative investments. Operating out of Tallin, Estonia, and Los Angeles, they manage a single fund open to US and international investors, with a minimum investment of $1,000.

Key executives include:

  • Suman Bannerjee is the CIO. He has spent most of his career working at investment firms including Millennium Management.
  • Alexander Cavendish, the CEO & co-founder who previously worked at UBS and Morgan Stanley.

Executive presence on LinkedIn is oddly sparse, and I don’t quite know what to make of it.

In researching this piece, the team quickly responded to our questions, and there are plenty of interviews with Bannerjee and the leadership team. But Cavendish’s LinkedIn profile picture is missing, and Bannerjee’s LinkedIn page is non-existent. ????

Anyways, Hedonova was founded on the back of a simple principle: because alternative assets are not as mainstream as other investment opportunities, they can be more difficult to source. Hedonova removes this hassle and packs exposure to these assets into a single fund.

Hedonova CIO Suman Bannerjee

What’s in the fund?

Hedonova allocates across 14 asset classes:

Crypto (20%)

Mainly Ethereum and Bitcoin. They’re very bullish on BTC and ETH, and consider them long-term holds.

NFTs are a different story. The bigger money seems to be moving out of art NFTs. Hedonova has exited their art NFT holdings, and are now focused on music and real estate NFTs (both of which are topics we’ll be covering shortly)

For the latter, they have signed an MoU with Estate Protocol to buy into their offerings.

Unicorn startups (17%)

Hedonova doesn’t fund seed round startups. Sure, the payoffs are higher, but so are the risks and holding periods. Instead, they purchase equity in unicorn startups via private market platforms or VC funds looking to exit their position.

Alongside institutional investors, they’ve joined funding rounds for SpaceX, Robinhood, Flexport, and Opensea.

One winner in particular has been Opensea, the world’s largest NFT marketplace. Opensea now averages $1+ billion in transaction volume each month, and their most recent valuation was $13.3 billion.

Equities (12%)

You may think it’s odd for an alternative investment fund to allocate to “normie assets” like equities. But equities are highly liquid, and balance out some of the illiquid holdings in the portfolio.

Equities they hold include:

  • Visa
  • Amazon
  • Microsoft
  • A Nordic market-focused ETF
  • An Indian banking-focused ETF
  • A Chinese healthcare-focused ETF

Real Estate (11%)

They invest in high-yield commercial, industrial and warehouse properties in emerging markets like India, China, and Southeast Asia.

While they invest in some vacation rentals, most of their real estate investments fall under what I’d call “alternative real estate, ” which includes distribution centers, warehouses, and data centers.

Investments are generally structured as syndicates, pooled funds, or focused REITs.

Cash (8%)

Always have cash. No matter how bullish markets get, you need to keep some dry powder.

Equipment Finance (8%)

Equipment financing is a form of supply chain capital, which we’ll talk about in the next section.

Asset-heavy industries prefer to lease some of their equipment or machinery. They essentially lease equipment and machinery to large corporations and earn periodic income.

In particular, they’re drawn to financing marine equipment, furniture, and medical equipment, including CT, MRI, and PET scan machines.

Litigation Finance (6%)

In 18 months of writing this newsletter, we’ve covered a ton of alternative assets. But of all the topics we haven’t yet explored, litigation finance is near the top.

In litigation finance, investors fund plaintiffs involved in lawsuits. If the suit succeeds, investors earn a portion of the settlement money.

Hedonova funds commercial arbitrations through LexShares and Burford, primarily contract breaches or copyright infringement cases. These litigations are generally short-term, resolving within a year.

This is definitely a topic we’ll be exploring in more detail soon.

Farmland (6%)

Farming generates returns from both crops and land appreciation. Because it provides actual cash flow and passive returns through appreciation, farmland is a very attractive asset class.

Farmland is our third-fastest growing topic, and last year we began doing farmland analysis.

Hedonova is invested in cocoa at a fixed purchase price — theoretically locking in future returns — and they’re on the cusp of closing a dragonfruit farm located in Punjab, India. Horrible tasting fruit, but it has yielded a juicy 35% IRR.

Artwork (4%)

They invest a small amount in fine artwork, mainly through Masterworks.

Wine (2%)

Their wine investments focus solely on those from the Rhone Valley in France. We just wrote an article on these delicious investment-grade wines.

Other (14%)

Hedonova has some cool smaller allocations, including

Indian wedding loans

If you’ve been to an Indian wedding, you know how large and expensive they are. These short-term loans are typically secured by collateral such as property.

Stock video footage

This is pretty cool: They buy and sell high-end stock video footage. I had never heard of this before.

Let’s say you have a movie that requires someone hanging from a helicopter. It’s costly to hire a helicopter and stuntman, so film production houses purchase thousands of stock videos instead.

Hedonova buys a portfolio of stock videos, and then sells them to production houses. The most lucrative scenes are helicopter shots, car chases, cityscapes (Paris, Florence, Barcelona), explosions, and flying missiles.

ISAs

They provide higher education student financing by buying Income Share Agreements (ISAs). There are a few companies providing access to ISAs, including Edly.

This is an actively managed fund, and trading activity is high. Although Hedonova actively invests through Reg A platforms, they do not do full buyouts.

Some investments will be flipped within 6–12 months (such as Indian weddings), whereas others like art, real estate, and farmland have much longer time horizons.

All dividends and cash flows are reinvested into the fund.

Investment philosophy

Hedonova’s investor updates tell you where and how they deploy capital. But only through interviews for this piece have they revealed the why.

Liquidity and supply chain financing form the cornerstone of their investment philosophy.

Liquidity

Many alternative asset classes are illiquid, making them hard to sell quickly.

To counter this, Hedonova invests in stocks, crypto, and NFTs because of the copious amount of capital flowing into them, and because they add easy liquidity to their portfolio.

This makes honoring redemptions far easier, and prevents them from having to liquidate holdings earlier than they’d otherwise like to.

To further help with liquidity, Hedonova often doesn’t purchase the actual physical assets, but stakes them via a special purpose vehicle (SPV).

For example, Hedonova invested in a hydro-powered Russian crypto mining operation. An attractive asset, sure. But what happens when they need to sell quickly to raise cash? It would be a logistical nightmare! Selling specialized offshore real estate like this would take months. But because Hedonova owned shares of the property, they were able to exit their position within a week.

About 30% of Hedonova’s portfolio provides cash flow, while 70% is based on appreciation.

Russian hydro giant En+ is getting into crypto mining

Supply chain financing

You may have noticed the global economy is going through some severe supply chain disruption. Global supply chain challenges have been a pervasive problem throughout COVID-19.

If you’re a supplier of goods, inventory is one of your biggest headaches. You need it to survive, but it ties up all your cash flow.

Supply chain capital is a form of finance where investors give suppliers early payment on their outstanding invoices. Companies love it because it reduces the risk of supply chain disruption and optimizes their working capital. Investors love it because it’s easy money backed by hard assets.

Hedonova looks for areas where the application of capital will make a particular asset class more efficient. Take whiskey manufacturing, for example. The alcohol needs to be stored in a barrel for decades before maturing. This means 10-30 years of storage & rent, all paid by the manufacturer.

Hedonova buys barrels from distillers like Bowmore and Macallan, holds them for a few years, then flips them to another investor. They profit from the sale, and the distiller solves their capital requirement glut. Win-win.

Manufacturers have to pay storage and rent on assets they can’t sell for up to 30 years. Supply chain financing solves this.

Another example is cosmetic surgery loans in Brazil, the world’s second-largest cosmetic surgery market.

Banks are typically reluctant to fund individual loans or even P2P lending platforms for this purpose, leaving a huge gap in the market. So Hedonova has created loan pools, which they securitize and then sell to a bank. The banks get an institutional-grade loan (which, unlike individual loans, they are willing to buy), Hedonova grows their portfolio, and Brazilians get their makeovers. Everyone wins.

Supply chain capital investments have a very low correlation to equity markets and help balance the fund’s risk.

About 65% of Hedonova’s portfolio is allocated to supply chain investments.

Ethics

Ethics are subjective, but that’s what makes them so interesting. Ethical investing is an area I like to explore, and I was glad to see Hedonova define an ESG policy.

The Russian crypto mining farm is a good example:

  • Completely hydro-powered
  • Has a 104% emission offset
  • Excess energy is added back to the power grid

Hedonova makes a conscious effort to avoid investing in any region where terrorism is rampant, and avoid investing in firms that pollute.

They also have a Sharia-compliant investment option that doesn’t include any alcohol.

Fund performance

When evaluating fund performance, the metrics that matter are IRR, CAGR, Standard Deviation, and the Sharpe Ratio.

Despite launching in mid-2020, the fund has delivered some promising results so far:

  • IRR is the growth rate that an investment is expected to generate annually. Since inception, Hedonova has boasted an impressive Internal Rate of Return of 63.2%.
  • CAGR is rate an investment would have grown if all profits were reinvested at the end of each year. Hedonova’s sits at an enticing 53.2%. (For perspective, this is 15.4% higher than the S&P 500 over the same timeframe.)
  • Standard deviation is a measure of stability and volatility. Hedonova’s fund has a StdDev of just 2.3 throughout its lifetime.
  • The Sharpe Ratio is one of my favorite metrics. It’s a measure of performance compared to risk. A higher Sharpe Ratio indicates you are getting a great return given the amount of risk involved. Hedonova’s fund has a Sharpe ratio of 2.66, which is generally considered very good. (In contrast, the S&P 500’s Sharpe Ratio currently sits at 1.84.)

Note: The high performance has been driven primarily by crypto. Ex-crypto, the fund’s CAGR is 32.1%.

Sharpe Ratio of the S&P 500 over the past year. Data courtesy of PortfoliosLab

Who can invest in Hedonova

Accreditation

The minimum amount is very low (just $1,000), but Hedonova is a Reg D fund, so investors must be accredited. KYC and AML checks are performed on all investors.

Location

Hedonova is incorporated in Delaware, but they have set up feeder funds that enable folks outside the US to invest.

These feeder funds, roughly equivalent to US LLCs, allow international investors to participate in Hedonova using their local currency and tax regulations. Investments into these funds are then pooled into Hedonova’s ‘master’ portfolio.

Due to KYC protocol, citizens from countries sanctioned by the United States cannot invest, nor can natives of Pakistan, Uzbekistan, and other Central Asian nations.

Fees

Hedonova has a 1 & 10 fee structure, where they charge a 1% annual management fee (1% of your portfolio value) and a 10% performance fee (Hedonova retains 1/0th of gross profits).

Secondary market

There is no secondary market for Hedonova’s fund. Investors who want to liquidate can sell their portfolio back to Hedonova.

Hedonova doesn’t charge a fee for leaving the fund, but the time required to exit can vary depending on the liquidity of invested assets. A full withdrawal of funds can take up to 30 days for individuals, and 180 days for institutions.

Hedonova’s future

The company has several goals for the next few years

  • Complete release of a Sharia-compliant fund
  • Have VC and PE funds comprise 2% of the portfolio (mid-2022)
  • Get into new asset classes, including music royalties (which have been super popular) and reinsurance
  • Spin up funds solely focused on specific asset classes (Dec 2022)
  • Make the funds completely blockchain-native (mid-2024)

Hedonova is a young fund, but to date, their performance has been quite impressive — even if half of it has been driven by crypto. The problem is that as funds get bigger, it gets tougher to find alpha,

However, while annual returns of 63.2% are unlikely to be sustainable, going forward Hedonova is targeting an aggressive but ambitious IRR of 25–30%.

Only time will tell if they hit their goals.

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Author

Stefan Von Imhof

Stefan Von Imhof

Stefan lives and breathes asset analysis and valuations. Before founding Alts, he was the Head of Product at Flippa, he created and ran Flippa's Due Diligence Program, and has bought & sold dozens of websites & newsletters. Prior to Flippa he was the first product manager at HG Insights, a market intelligence company which sold to Riverwood Capital Partners. Originally from Boston and later Santa Barbara, CA, he now lives in Australia with his wife & Boston Terrier, Charlie.

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