Last week we reported that in the aftermath of the vicious high-flying momo, high-beta mauling, hedge funds had their worst week since 2001 (excluding such "end of the world" days as Lehman and the 2011 debt ceiling fiasco). Specifically, we said that the crush was nowhere worse than in the "hedge fund hotel" basket of names most near and dear to the hearts of hedge funds, and respectively those most hated, one which Goldman defines as the long Very Important Positions <GSTHHVIP> vs. short Very Important Shorts <GSTHVISP>. This is how the chart showing the weekly hedge fund P&L of this most popular pair trade looked like.
We ruminated on the benefits of hedge funds which no longer "hedge" and try to reach for alpha, but are merely levered beta-pursuing vehicles: "when after five years of underperforming the market, investors continue to ask themselves just what are they paying hedges 2 and 20 for - obviously it is not to hedge risk, in a market in which the Fed has made it all too clear a market downturn is no longer a possibility. It must be for the "benefits" of the herd effect of everyone loading up on the same positions, and when one sells, everyone sells and leading to sharp losses for the bulk of the "smart money out there."
Well, as expected, the next week - the one that just passed - what was certain to be a reflexive, margin call-driven continuation of the selloff as levered positions continued unwinding, indeed happened.
Goldman's David Kostin reports:
"The recent momentum reversal has focused on high growth stocks, many of which are constituents in our hedge fund basket"..."high expected sales growth and firms with high EV/sales multiples. Our 50-stock sector-neutral portfolio of firms with the highest expected sales growth surged 3.4% during the first 60 days of 2014 (250 bp above S&P 500), before retreating by 2.4% during March and trailing S&P 500 by 320 bp (Bloomberg: <GSTHREVG>). Stocks on both lists were social media, internet, and biotechnology firms that had led the market during the prior six months. These high growth/high multiple stocks feature prominently on our list of “stocks that matter most” to hedge fund performance (<GSTHHVIP>). Having outperformed by 230 bp through February, our VIP basket dropped 2% in March while S&P 500 climbed 0.8%. Long positions trail by 98 bp YTD."
Or, said much more simply, a furious unwind of levered positions for the second week in a row.
So furious that some of the marquee hedge fund names are already getting slammed for the year in what everyone said would be a guaranteed way to make a killing in 2014. From the WSJ:
Andor Capital Management LLC, once one of the world's biggest technology-focused hedge funds, plunged 18% last month. The $15 billion Discovery Capital Management LLC lost 9.3% in its flagship fund.... Both funds are in the red for 2014, according to people familiar with the firms.
Many of the biggest hedge-fund falls stemmed from wagers on highflying technology stocks that shot up last year and in the first two months of 2014. The last week of March was one of the worst weeks for stock hedge-funds' returns compared with the S&P 500 since 2001, according to Goldman Sachs Group Inc., which tracks the stocks important to hedge funds.
Andor, based in Rye Brook, N.Y., saw its fortunes reverse after sticking to a strategy that drove the firm to a 35% gain in 2013. Some of the firm's biggest long-term positions, including Facebook and Google Inc., fell steeply last month.
Founded by former Pequot Capital Management co-head Daniel Benton, Andor manages about $1 billion. Mr. Benton previously managed more than $6 billion in an earlier incarnation of the firm.Andor was down 5% in the first quarter overall, according to a person familiar with the firm.
The $9 billion Coatue Management LLC, started by Philippe Laffont, a veteran of Julian Robertson's Tiger Management, also was hurt by the reversal in technology stocks. Coatue's flagship fund lost 8.7% in March and is down 7.4% for the year. A spokesman declined to comment.
Another Tiger alumnus, Robert Citrone of Discovery, described the month's carnage as a "perfect storm." Wagers involving stocks accounted for 85% of the firm's March losses, the people said.
Curious which hedge fund is unwinding (the first of many)? Here is the answer:
Discovery was founded in 1999 by Mr. Citrone, a part-owner of the Pittsburgh Steelers football team.
On an investor call Thursday, Mr. Citrone said Discovery had reduced the amount of risk it was taking and that he remained confident that U.S. growth was accelerating.
Last time Discovery caught a lucky break:
Several investors said they were concerned by the magnitude of Discovery's March loss but added that they expect volatility from the firm, which has returned an average annualized 17% since inception. Discovery has rebounded from similar-size losses before. In about a month last year, from mid-May through late June, Discovery's $8.5 billion flagship fund lost 9%, in part because of a decline on Japanese stocks. But the fund more than made up the loss by the end of the year, returning 27% for 2013.
This time it may not be so lucky.
Ironically, we were right once again because as Goldman further adds: "Short holdings created problems by rising 130 bp more than S&P 500 YTD."
Gee, where have we seen this before, not to mention predicted this would happen? Why here: "Presenting The Best Trading Strategy Over The Past Year: Why Buying The Most Hated Names Continues To Generate "Alpha"
Thank you Chairman Bernanke and Chairmanwoman Yellen, not to mention HFT vacuum tubes, for making the market so broken, a tinfoil blog can outperform the smartest money in the street.
Finally, for those curious where the pain will continue to be focused as the HF levered unwind accelerates, here are the most held long hedge fund positions where the slaughter will be the most painful in the coming days.
And here are the most hated ones. Needless to say, these should continue to generate what little "alpha" is left in this pathetic, rigged, broken market.