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What Hedge Fund Panic Looks Like

Tyler Durden's picture




 

We have previously said a lot about the "hedge fund hotel" implosion observed in the third quarter, a quarter in which many of the hedge fund community's favorite stocks all suffered spontaneous disintegration leading to unprecedented drawdowns for some of the industry's "best and brighetst" names.

Now, it's Goldman's turn. In the firm's Q3 hedge fund tracker report we read that "from July through October, hedge fund favorite stocks posted their worst relative returns outside of 2008." Goldman continues by admitting that when all hedge funds pile up in the same handful of names, and when even a small disturbance appears, all 2 and 20 bets are off. The result: the firm's Hedge Fund VIP list of companies most beloved to the "smart money" suffered its worst perforamance since 2008 driven almost entirely by just one company: Valeant.

Our Hedge Fund VIP list (ticker: GSTHHVIP) of most popular long positions underperformed the S&P 500 by 720 bp during that three-month window (-8% vs. -1%) as a sharp downturn in Valeant Pharmaceuticals (VRX) and other previously high-flying healthcare stocks weighed on fund returns. After outperforming the S&P 500 by 7 percentage points (pp) in 2012, 9 pp in 2013, and 3 pp in 2014, the VIP list has lagged the S&P 500 by 5 pp year to date (-2% vs. +3), putting 2015 on pace to match 2011 as the worst year for hedge fund favorite stocks post-crisis. With its 66% decline since the VIP list’s last rebalance in August, VRX alone accounted for 26% of the basket’s negative return. Healthcare in aggregate accounted for nearly 70% of the fall.

The result: hedge funds are not only about to post their 7th consecutive year of S&P500 underperformance, but the entire "2 and 20 model" is in greater jeopardy thatn ever, which incidentally is what we have said all along: who needs to "hedge" when you have every central bank in the world doing everything in their power to avoid even a 5% decline in the "market"?

 

And to think that until a year ago, countless hedge funds could not shut up during idea dinners pitching the "no brainer" upside in names like Allergan and Valeant. One year later, marquee asset managers like Bill Ackman are fighting for their investment lives and praying not to get redeemed out of business.

Goldman continues:

The poor performance of favorite long positions has weighed on aggregate hedge fund returns, which entered negative territory during the market correction in August and have yet to recover. The average hedge fund has returned -2% YTD in 2015, compared with +3% for the S&P 500 and +2 for the 7-10-year Treasury ETF. Event-driven hedge funds have fared especially poorly, with the typical fund down 6% YTD.

 

And this is what hedge fund panic looks like: after being one of the top 10 most widely held names as recently as Q1, Valeant has seen a plunge in not only its stock price, but also the number of fund who own it. One can be 100% certain that as of November 20 the number is vastly lower than the 87, already a one year low, recorded as of Sept 30.

Perhaps if only these "smartest people in the room" had actually done their diligence instead of rushing to buy a stock just because others bought the stock or, gasp, hedged their exposure, none of this would have happened. But then again that means doing actual work - why bother when all the idea dinner participants can just hope nobody pulls a SIRF and uncovers a specialty pharmacy ticking time bomb hiding just below the surface.

So with all that in the rearview mirror, surely the HF industry has learned its lesson and will henceforth stay away from massively concentrated, illiquid positions, right? Wrong...

Despite the Valeant share price collapse and subsequent hedge fund shift away from former high momentum leaders, funds continue to own the handful of outperforming mega-caps that have driven historically narrow market breadth in recent months.

... a handful of mega-caps which as we showed earlier this week, represent primarily high growth, consumer-facing tech companies, which have accounted for the overwhelming majority of the index total return.

Finally this: the last time hedge funds were as unhedged as they are now, and instead have had the highest concentration of "top 10" names, was in 2008.

Hedge fund returns continue to grow more dependent on the performance of a few key stocks. The typical hedge fund has an average of 67% of its long-equity assets invested in its 10 largest positions, continuing the trend of higher “density” in the past decade and reaching the highest level since the Financial Crisis. This statistic compares with 33% for the typical large-cap mutual fund, 22% for the average small-cap mutual fund, 18% for the S&P 500 and just 2% for the Russell 2000 Index.

For the sake of these "smartest people" in the room - who so very often turn out to be anything but - we hope there are no more "Philidor" moments among the remaining super-concentrated holdings, or very soon the myth that these investors are in some way "smarter" will have as little credibility left as the Fed itself.

 

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Sat, 11/21/2015 - 11:28 | 6821126 fudge
fudge's picture

this is only the calm before the storm

Sat, 11/21/2015 - 12:03 | 6821221 junction
junction's picture

The party is over for now and all the big boys have left with their toys.  For the rest of us, continue to read in the MSM how the rich and famous are buying houses for 8 figure sums and to find out the latest cancer breakthroughs.  Note: Cancer in America is at all time highs, excessive patient deaths in many hospitals are covered up and illegal drug dealing by lawmen is also at an all time high. 

Other than that, things are peachy.

Sat, 11/21/2015 - 13:09 | 6821395 KnuckleDragger-X
KnuckleDragger-X's picture

The hedger's and PE's need a good old fashioned turpentine enema.......

Sat, 11/21/2015 - 14:12 | 6821555 Hype Alert
Hype Alert's picture

I wonder what will happen when they discover NetFlix's trailing P/E of 326 and forward of 467 is going to get cannibalized by HULU and every network that wants to rent some of Amazon's Web Services?  After last weeks 20% moon shot, the 87% institutionally owned owners might question playing musical chairs with it.

 

The names at the top are getting thinner by the day.

Sat, 11/21/2015 - 11:28 | 6821129 Baby Eating Dingo22
Baby Eating Dingo22's picture

But then came November and all was well again

Sat, 11/21/2015 - 11:34 | 6821150 two hoots
two hoots's picture

Wonder if money flowing out of hedge funds flowed into equities (S&P/DOW) and that  is some of the reason for the recent rise?

Sat, 11/21/2015 - 11:36 | 6821157 CHoward
CHoward's picture

Enjoy life as you know it now while you can.

Sat, 11/21/2015 - 15:25 | 6821752 roadhazard
roadhazard's picture

That's a big 10/4. I'm doing my part.

Sat, 11/21/2015 - 11:37 | 6821159 eyesofpelosi
eyesofpelosi's picture

I was talking to a unicorn just the other day and it told me that everything was awesome!

Ya know, jeesh people, unicorns do not lie!

Sat, 11/21/2015 - 11:45 | 6821173 _ConanTheLibert...
_ConanTheLibertarian_'s picture
Two unicorns walk into a bar, the first unicorn says to the second one, did you hear about that unicorn who robbed a bank and drove off scot free? 

Second unicorn: Don't be ridiculous, everybody knows unicorns can't drive.

Sat, 11/21/2015 - 11:57 | 6821212 Arnold
Arnold's picture

Skittles have fallen out of favor since Ferguson.

http://www.zerohedge.com/news/2014-08-15/ferguson-police-release-surveil...

Sat, 11/21/2015 - 11:51 | 6821199 Your guess is a...
Your guess is as good as mine's picture

Bolocks, bollocks, bollocks.

Sat, 11/21/2015 - 11:55 | 6821205 Soul Glow
Soul Glow's picture

I wonder what the Fed's book looks like?  

I guess we'll never know.

Sat, 11/21/2015 - 12:08 | 6821226 Cruel Aid
Cruel Aid's picture

We'll never know bc .gov is broke and i dont mean out of money, which we all know it is.

Vote all you want, Ryan to get a look at it. Never going to happen.

Cant manage endgame if we can see their cards

Edit: lets see if Ryan funds the potential terrorist immigration wave. Bet he does. doesnt matter, im sure there is some executive order to fund it.

Sat, 11/21/2015 - 12:00 | 6821215 maxamus
maxamus's picture

Just BTFD.

Sat, 11/21/2015 - 12:02 | 6821222 surf0766
surf0766's picture

Charts do not matter. There is only print and propaganda

Sat, 11/21/2015 - 12:18 | 6821263 Atomizer
Atomizer's picture

Iron condors options. What you need is alphabet soup checking into SOAP services and Shodan engine to take down Hillary Clinton. 

If you public servants don't, we will. You'll become fired without pension. 

How to 0wn an ISP in 10 Minutes - YouTube

Shodan

ISP's Unauthenticated SOAP Service = Find (AlmostAll The Things!

Get to fucking work. She belongs in jail. 

 

Sat, 11/21/2015 - 12:57 | 6821368 jerry_theking_lawler
jerry_theking_lawler's picture

Can't wait until after the FEDs Monday secrete meeting....it's gonna be good I'm sure!!

Sat, 11/21/2015 - 13:39 | 6821468 yellensNIRPles
yellensNIRPles's picture

Who cares anymore? If any of this 'news' affects you or your portfolio, you are already fucked, you just don't know it yet. 

Sat, 11/21/2015 - 16:29 | 6821966 watmann
watmann's picture

As Hillary said, "WHAT DIFFERNCE DOES IT MAKE." If we accept the FACT that the markets worldwide are manipulated by the central banks why invest in stocks? If you followed Zero Hedge for years you will agree that they have been 100% incorrect. Maybe in the end they will be right but this Monopoly game has been going on for years. What Zero fails to recognize is that there is only one way out of this mess and its through inflation of currency. Can this be achieved? Probably not because the end result of 0% interst rates is over capacity which creates excess of supply which creates deflation. Thats what is really taking place not what Zero states. Essentially we will devalue the world currencies in a reverse split to pay off the huge debts thay we have printed. The only standing currency will be Gold as iwill become the value standard to which currencies are converted from. This is even more telling by the fact that Central banks are taking physical control of their gold deposits; paper gold is trading like junk and real gold is down. Buy the real stuff and take possession of it in my opinion. Everythingelse will become  a liability.

 

When you see something that doesnt make sense it doesnt make sense. Simple.

 

There is a lot of fake money money to be made in a fake market, just remember to convert it along the way

If I were running for President and won, my economic policy would be to break up monopolies of Keynesian fundementals. This means breaking up monopolies of land, labor and capital. Break up the big monopoly entities that have in part been created by their access to 0% unlimited capital and monopolistic methods the own markets. If you dont do this we will get to the Marxian conclusion of Socialism and Communism as we reach a point wheree there is insufficient demand and purchasing power to support the debt ladened entities whose spreadsheets and forecasst work Goldman forecasts but implode without the real customer demand. Recall the "shovel ready projects" that didnt exist? You need real demand regardelss if its form destruction or infrastruure development. The concept of transfer payments will fail in the end because the demand is fleeting.

 

A monopoly game with concentration of ownership will only work if the bank will continue to lend me money to pay the rent everytime I hit Boardwalk. Eventually this gets boring and you have war becasue people feel unabled.

 

 

Sun, 11/22/2015 - 02:32 | 6823589 Youri Carma
Youri Carma's picture

Wonky.

Do NOT follow this link or you will be banned from the site!