The curated database of hedge funds that publish investor letters. Research by geography, strategy, and schools of thought.
| # | Fund | Strategy | Style | Geography | AUM | Latest Letter |
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As of Oct 15, 2026
In its 2026 Q3 Letter to Investors, Distillate Capital highlights mounting systemic vulnerabilities created by AI euphoria and rising interest rates while reviewing performance across its investment strategies. Year-to-date through September 30, 2026, the flagship U.S. FSV strategy returned 9.39% net of fees, lagging the S&P 500 (+12.73%) and Russell 1000 Value (+19.23%). Since its May 2017 inception, U.S. FSV has generated an annualized net return of 13.95%, outperforming the Russell 1000 Value by 2.82% annualized with an upside capture of 106.6% and downside capture of 95.2%. Across other strategies, U.S. SMID Quality & Value returned 18.46% YTD (vs. 13.87% for Russell 2000), Long/Short Equity returned 20.92% (vs. 12.73% for S&P 500), U.S. Free Cash Flow 500 returned 15.83%, and International FSV returned 8.57% (vs. 13.85% for MSCI ACWI ex-US). The commentary delivers a rigorous macro critique of market structure. Over the past three years, the Russell 1000 gained $32 trillion in market capitalization against only $400 billion in incremental NTM free cash flow. Hyperscalers (Alphabet, Amazon, Meta, Microsoft, Oracle, SpaceX) saw cumulative FCF collapse by roughly $450 billion due to soaring capex, while supplier profits (such as NVIDIA) merely recycled hyperscaler spending in a dynamic reminiscent of 1990s vendor financing. The market value of the S&P 500 relative to U.S. GDP ('Buffett Indicator') and global GDP has breached historical records, while 3-year market cap gains exceeded GDP gains by over 6x. Simultaneously, rising global bond yields pose an asymmetric threat to equity multiples that have historically moved in lockstep with fixed-income yields but recently decoupled. Portfolio positioning remains resolutely anchored in fundamental value and quality. During the recent quarterly rebalance, U.S. FSV initiated new positions in Lowe's Companies (1.4%), AppLovin (1.3%), and PACCAR (1.0%), while adding to UnitedHealth Group, Deckers Outdoor, and Booking Holdings. The strategy exited Abbott Laboratories (-1.3%), Workday (-1.2%), and Global Payments (-1.2%), while trimming Salesforce, Accenture, and Merck. Sector exposures reflect significant overweights to Health Care (22.5% vs. 9.3% in S&P 500) and Industrials (19.7% vs. 8.0%), and a marked underweight to Information Technology (17.6% vs. 39.7%), holding zero direct exposure to the mega-cap hyperscalers and Apple. The resulting portfolio exhibits an 8.0% FCF yield, 0.84 cash flow stability score, and zero exposure to unprofitable, cash-burning enterprises, positioning the strategy for resilience in an increasingly volatile, rate-sensitive market environment.
Distillate Capital's investment philosophy anchors on disciplined value investing rooted in normalized free cash flow yield, cash flow stability, and balance sheet strength (low leverage), systematically rotating out of expanded valuations into undervalued, cash-generative businesses. In Q3 2026, the team identifies extreme concentration and valuation risk in mega-cap artificial intelligence (AI) stocks, drawing direct parallels to the late-1990s technology bubble. The top 20 AI stocks represent over 40% of the Russell 1000 Index and trade near an unsustainable multiple of ~100x NTM FCF, having captured $20 trillion of the market's $32 trillion 3-year market cap expansion despite flat aggregate forward free cash flows. Distillate contends that unprecedented hyperscaler capex, circular vendor financing, power grid constraints, and rising global bond yields create acute downside risk for market-cap-weighted indices. By contrast, non-AI equities and value-oriented compounders provide compelling risk-adjusted upside and fundamental insulation.
Distillate anticipates a multi-year reckoning for the AI ecosystem as massive capital expenditure cycles collide with economic reality and rising cost of capital. Hyperscalers are projected to remain free cash flow negative through 2029, relying on heavy corporate debt issuance ($500 billion YTD) and equity dilution to finance buildouts that require an improbable $3 trillion in annual AI revenue by 2030 to deliver even a modest 10% ROIC. These revenue targets face severe hurdles, including power generation shortfalls (only half of planned 2026 capacity is under construction), low customer switching costs, edge-computing model efficiencies, and price deflation from open-source alternatives. Concurrently, the 40-year secular decline in bond yields has reversed due to fiscal deficits, stubborn inflation, and corporate debt crowding out, exposing equities to significant multiple compression as equity FCF yields sit at historic lows relative to Treasury and BAA corporate yields. The firm expects value-oriented strategies with durable, self-funded cash generation to significantly outperform as markets re-tether to long-term economic fundamentals.
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