(Bloomberg) -- One of Australia’s largest and most secretive hedge funds is sticking with its highly concentrated bet on Zillow Group Inc., predicting a sharp rally after the shares lost more than a quarter of their value this year.

Sydney-based Caledonia is the biggest shareholder in Zillow, the real estate firm that’s slumped 26% this year and trades at about one fifth of its 2021 peak. That roughly $2.2 billion stake ranks among the world’s most concentrated US equity positions held by a hedge fund, according to data compiled by Bloomberg.

The slide is testing the nerves of money managers at Caledonia, which first bought into the stock more than a decade ago. They say it’ll triple by the end of next year, according to a March investor letter seen by Bloomberg. That’s around three times higher than the average forecast of Wall Street analysts.

“We have stuck with these positions and have not been bluffed out at the bottom, and we are going to strive mightily to not sell them too early,” co-chief investment officers William Vicars and Michael Messara wrote in the letter. “Volatility comes with the territory for us, and we are good with that.”

Caledonia didn’t reply to requests for comment. A spokesperson for Zillow declined to comment. 

High conviction, out-of-favor bets, like Zillow, are common place at Caledonia, which keeps a low public profile. The privately held fund manager launched in 1992 from the wealth of Australia’s Darling family — a fortune built on grain and mining. In January, it managed about $11 billion and the fund has served Australia’s business elite, including the Packer and Fairfax families, former giants of the media industry. 

While dealing with underperforming stock bets is part and parcel of life for hedge fund managers, the concentration of those wagers puts Caledonia in a relatively rare position. 

The Zillow stake makes up around two-thirds of Caledonia’s disclosed US equity investments, a level of concentration that ranks as the fifth-largest in a Bloomberg analysis of hedge fund positions worth at least $1 billion relative to a firm’s US stock portfolio. For Caledonia, the holding also makes up about a fifth of the assets the firm reported in January.

Executive Meetings 

Caledonia investors will also get a chance to quiz Zillow senior executives themselves later this year. A client event will be hosted in December with Jeremy Hofmann, the real estate group’s chief financial officer, and Brad Berning, head of investor relations, according to the investor letter.

The origins of the Zillow position can be traced back in part to the firm’s desire to own market leaders in real estate. Messara said in a 2014 interview with Bloomberg TV shortly after building its stake in the company that Zillow was set for substantial profit growth from increasing advertising generated revenue in the US, similar to Rightmove Plc in the UK and REA Group Ltd. in Australia. 

Now, Zillow says it’s expecting stalling growth in the US housing market and projects lower sales in its core business. That disappointing outlook earlier this month helped drag on the shares, which now sit at about $41.80. That’s about 79% below the 2021 peak when the company’s market value touched $48 billion.

Caledonia reportedly fell more than 50% in the year through June 2022, only to partly recover in the following 12 months, echoing Zillow’s sharp decline and partial rebound. Exiting the stock would likely prove difficult, given prices can quickly move against large sellers. 

‘Extremely Well Positioned’

The fund’s sway over the stock may be under-appreciated given the hedge fund’s clients invest separately alongside the fund. One, billionaire James Packer, purchased 9.4% of Zillow in 2013, only to retreat in the following years, while Vicars and Messara noted recent buying. “We have seen some existing clients add to Zillow over the past year, and we are thrilled by this uptake,” the pair said in the March letter.

The hedge fund’s recent letter signaled its commitment to the investment is intact. The US housing market is a “coiled spring” that will eventually benefit Zillow as home transactions increased, Vicars and Messara wrote. 

“Zillow is extremely well positioned for the eventual rebound,” they said. “We think Zillow can achieve very significant earnings growth and exceptional share price performance.”

--With assistance from Rick Zhao and Patrick Clark.

©2024 Bloomberg L.P.