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."
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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.
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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.
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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.
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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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