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By Svea Herbst-Bayliss
BOSTON, Aug 28 (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 (NASDAQ:FB), pharmaceutical company Valeant,
internet retailer Netflix (NASDAQ:NFLX), carmaker Tesla Motors (NASDAQ:TSLA) 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. ID:nL1N1101FQ
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 (NASDAQ:AAPL), 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.