Hedge funds that crowded into same names likely to nurse losses

[August 28, 2015]  By Svea Herbst-Bayliss

BOSTON (Reuters) - Hedge fund managers often promise to find stock ideas off the beaten path but this month many prominent players have been bloodied by doing exactly the opposite; betting on a small handful of popular names that sold off sharply in August.

The carnage of the last week - even with Wednesday's and Thursday's rebound - has been particularly acute for investors who have seen their overweight positions in companies such as social media site Facebook, pharmaceutical company Valeant, internet retailer Netflix, carmaker Tesla Motors and renewable energy company SunEdison get pummeled in the last days.

As a result, people who have money with David Einhorn's Greenlight Capital, Leon Cooperman's Omega Advisors, Chase Coleman's Tiger Global, Philippe Laffont's Coatue and others are bracing for red ink when August data comes out next week. Only a few managers have actually told investors about their losses.

"People will be shocked by how bad the numbers will be," said Peter Rup, chief executive and chief investment officer at Artemis Wealth Advisors, which invests in hedge funds, adding "they will be down 8 percent (for the month) and for some people it may be a lot worse."

The average hedge fund is off almost 2 percent for the year, according to Hedge Fund Research data, while the Standard & Poor's 500 index is down almost 5 percent.

One reason the declines may be so big is that managers have tended to crowd into similar stocks, some lulled by years of rising markets, several investors said.

For example, Omega Advisors, which investors say is off 12 percent this month, was hurt most by SunEdison's <SUNE.K> 47 percent plunge this month, investors said. The stock fell 14 drop in the last five days alone, even though it came back on Thursday, and also hurt Greenlight Capital and Daniel Loeb's Third Point, investors said.

Earlier in the week, Omega's Steven Einhorn said his firm believed stocks would rebound. The S&P lost more than 11 percent in a six-day run of losses before recovering, gaining 6 percent on Wednesday and Thursday combined.

Greenlight investors, tracking the fund's returns, said Einhorn is likely down by double digits this month, further worsening a year in which he was down 9 percent through July. A spokesman declined to comment.

Similarly, an 8 percent drop in Valeant <VRX.TO> in the last five days, plus Facebook's 9.5 percent decline and a 12 percent tumble in Netflix, also hurt big funds.

At William Ackman's Pershing Square Capital Management, Valeant makes up roughly one third of the portfolio and the billionaire investor said on Wednesday that his 10 percent gain through the end of July was gone – he's down 13.1 percent in August through the 25th.

The declines in Facebook and Netflix were big detractors for Philippe Laffont's Coatue Management, while Netflix was the number one drag on Tiger Global in the last five days, according to Symmetric, which tracks and analyzes public U.S. hedge fund stock holding reports. Shares of Netflix are still up 141 percent for 2015.

CROWDED NAMES

Hedge fund investors have long complained that when stocks fall, many big-name funds lose money at the same time. Whether managers swap stock picks at private dinners or find tips at conferences, they worry funds no longer deliver the uncorrelated investments they promise.

"Hedge funds do love the crowded names and the bigger a fund gets, the more likely it is we see them in common names," said Brad Balter, managing partner at Balter Capital, which invests with hedge funds.

But some investors also say there is good reason to crowd into some stocks, largely because they are the ones expected to perform well. The drop in Apple, one of the hedge fund industry's most widely held names, has been largely reversed, easing the initial sting on portfolios.

"Sometimes the fundamentals are extremely compelling," said Troy Gayeski, who invests in hedge funds at SkyBridge Capital. "This is the case primarily for healthcare names where fundamentals are improving, valuations are very reasonable, and continued accretive transactions are highly probable."

Some healthcare oriented funds, including Perceptive Life Sciences Offshore Fund and CCI Micro Healthcare Partners Ltd, have been among the industry's most successful this year. Among S&P 500 sectors, health care is one of just two in positive territory in 2015, having gained 3.1 percent on the year.

Even as hedge funds were seen as trying to trim their positions in the wake of this week's sharp losses, many are expected to stick with the names they like. Ackman, for example, said he had not made significant adjustments to his portfolio.

Long-term investors expect hedge funds to perform better, especially if markets trend lower.

"If we look at how hedge funds have performed over these times of drawdowns, they've done a whole lot better than the average fund," said David Saunders, founding managing director, K2 Advisors, which invests with dozens of hedge funds.

(Reporting by Svea Herbst-Bayliss. Editing by David Gaffen and John Pickering)

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