Stan Druckenmiller, a renowned hedge fund manager and former lieutenant of George Soros, made a strategic investment in NVIDIA in late 2022. By the end of 2023, his investment in the market-leading AI chip company accounted for over sixteen percent of his portfolio, with approximately $550 million invested.
Druckenmiller’s bet on NVIDIA began to pay off in early 2024 as the stock started to rise. However, he recognized that the market had caught up with his insights and decided to sell his call options and a significant portion of his shares when the share price exceeded $900. By the end of the first quarter, he had cut his holdings by nearly 84%, leaving him with around $159 million worth of NVIDIA shares.
Despite this success, Druckenmiller is now moving on to a new challenge in his life, which proves to be significant. His most substantial position at the end of the first quarter was call options on the iShares Russell 2000 ETF, estimated to be worth approximately $664 million. The iShares Russell 2000 ETF tracks the performance of small-cap stocks, which have lagged behind larger companies like NVIDIA in recent months.
While megacaps like NVIDIA have driven overall stock market performance, small caps have struggled to keep up. The Russell 2000 index, representing small-cap stocks, is still fourteen percent below its all-time high in 2021. In contrast, the S&P 500 has been steadily climbing and surpassing previous high points throughout the year.
One reason for the underperformance of small caps is their vulnerability to fluctuations in interest rates. Bloomberg reports that 75% of the debt held by Russell 2000 companies needs to be refinanced by 2029, compared to only 50% for S&P 500 companies. This discrepancy exposes smaller companies to greater risks when interest rates rise.
In conclusion, Stan Druckenmiller’s investment in NVIDIA yielded significant gains, but he decided to sell a substantial portion of his holdings. His focus has now shifted to small-cap stocks, as reflected in his significant position in call options on the iShares Russell 2000 ETF. However, small caps have faced challenges in recent months, lagging behind larger companies and struggling to reach previous high levels. The vulnerability of small caps to interest rate fluctuations further adds to their difficulties.
