The traumatic GameStop short squeeze of 2021, which wiped out a staggering $4 billion from Dan Sundheim's hedge fund in just one month, served as a brutal lesson. That shock prepared his firm, D1 Capital Partners, for the market turmoil of March 2024, when hedge funds again rushed to unwind risky bets. This time, D1 was ready.
Learning from the Meme Stock Mayhem
In a recent letter to investors, Sundheim reflected on the firm's evolution since 2021. Back then, retail traders famously banded together to drive up prices of heavily shorted stocks like GameStop, AMC Entertainment, and BlackBerry, causing massive losses for many hedge funds. D1 Capital, managing $25 billion in assets, was among the hardest hit. Sundheim admitted the event left him in a state of shock, forcing a fundamental rethink of the firm's risk management and positioning.
"In our earlier years, these conditions — US and tech underperformance, hedge fund de-grossing, crowded stock unwinds, and retail-oriented short squeezes — would have likely resulted in much more volatile results for our public portfolio," Sundheim wrote in a September investor letter. "But we were better prepared this time."
The 2024 Strategy: Diversification and Vigilance
D1's comeback strategy was multi-pronged. The firm started 2024 with its highest-ever net exposure to companies outside the United States. When investor nerves frayed in March and April due to US tariff announcements and conflict in the Middle East, D1 focused its bets on long-term opportunities.
The preparation was put to the test again in July 2024, when individual traders targeted another set of highly shorted stocks, including Opendoor Technologies and Kohl's. D1 avoided significant damage because it had already diversified its short positions, enhanced its risk monitoring systems, and deliberately limited its exposure to such volatile, crowd-driven plays.
"This enabled us to maintain our positioning even as a squeeze played out over the subsequent months," Sundheim explained. The results speak for themselves: D1's stock-picking portfolio had gained 23% by the end of August, outperforming many rivals. For the period through November, the firm's stock book is up an impressive 28%, according to a person familiar with the confidential numbers.
Winners, Losers, and an AI-Powered Future
D1 attributes much of its success to "transformational bets"—investments in companies undergoing major management or product shifts, or those riding powerful new trends like artificial intelligence. Its five biggest winners this year include Siemens Energy AG, Hanwha Aerospace Co., Rolls-Royce Holdings Plc, AppLovin Corp., and Philip Morris International Inc. Notably, four of its five largest losses came from short positions that went against the firm.
Looking ahead, Sundheim is a strong believer in artificial intelligence, but not necessarily in the way most think. He argues that AI has so far significantly affected only a small number of public stocks, mostly on the positive (long) side. He anticipates that the real stock-picking goldmine will be on the short side, as AI disrupts legacy industries and exposes vulnerable companies. "We anticipate that the short opportunities will be even more plentiful," he wrote, forecasting that AI will create an ideal environment for discerning stock pickers.
From a $4 billion shock to a 28% year-to-date gain, D1 Capital's journey highlights a Wall Street truth: adaptation is survival. By learning from the meme-stock frenzy and building a more resilient, AI-aware strategy, Sundheim's firm has engineered a notable financial turnaround.
