In this article, we'll touch on the major position trends within hedge funds after the Q1 2016 public filings.
In depth position-level trends are provided to Novus clients upon filings, along with Top Stockpicker analysis and bespoke portfolio holdings decomposition. Like in prior quarters, we’ll touch upon 5 securities in various themes on the blog:
Event / Hard Catalyst
Allergan (NYSE: AGN)
Last quarter saw heavy initiation by active funds into the now defunct merger with Pfizer (NYSE: PFE). For 2016, we model a loss of $6.04bn, without even modeling merger arb players who were also short the PFE stub. However, Hedge Funds decreased their ownership of the stock meaningfully into the end of the quarter.
They decreased the aggregate equity holding by $2.26bn (while increasing put option exposure by $225mm) which likely shielded losses, compared to a similar deal break in SHPG/ABBV in October 2014 which saw ramp-up into the deal break. Position reduction was precipitated by funds like Viking, Soroban, Coatue, Jana, Fir Tree, and Corvex, who collectively shed over $1bn of the name before March 31st. Conversely, funds like Lone Pine ($500mm initiation), DE Shaw, Two Sigma, and Eton Park added heavily to the stock in the 1st quarter.
Conviction Kings and Pawns1
Facebook (NASDAQ: FB)
The #1 conviction ownership stock in our hedge fund universe, Facebook saw 43 managers hold the stock as a conviction position (up from 28 last quarter). Aggregate ownership increased by $4.04bn over the quarter, generating a modeled gain of $1.6bn through Friday’s close. Some of the biggest movers in the stock include Viking, which initiated a $2.3bn position, followed by Citadel, Discovery, and Lone Pine. Facebook has been a meaningful alpha generator for the Hedge Fund Universe, especially after owners began pouring in in the aftermath of the disastrous IPO.
Hedge Funds Continue to Capitalize on Facebook
Valeant Pharmaceuticals (NYSE:VRX)
In February we wrote this about the stock:
“One interesting parable investors can learn from Valeant is mean reversion, a topic we touched upon in this post. From 1999 until July 2015, Valeant produced a simulated 2000% return on capital with $28.4bn of profit to hedge fund owners, which is utterly staggering, especially for early owners such as ValueAct. Since July, the stock has nearly returned all of the economic profit, losing nearly $22.7bn for hedge funds. Given its current shares held by hedge funds, the stock would have to fall another $35.5 per share (back to levels it traded at circa 2012) to completely erase the economic profit for active management that this once talisman created…”
Since then, our round-trip has been completed, as Valeant’s inception to date gain/loss for hedge funds (excluding options) has moved to the red (3.13bn loss, to be exact). Unsurprisingly, VRX fell from our top conviction lists with managers fleeing the name (an aggregate $11.2bn reduction in cash equity value):
Within our universe of managers, Brahman, Viking, Lone Pine, GMO, Coatue, and Jana completely exited the name. Conversely, Pershing, Pentwater, and Glenhill added to the name, while Point72, Tourbillon, Corvex, and Camber initiated.
Hedge Funds Ride Amazon
Amazon (NASDAQ: AMZN)
AMZN, which was the highest alpha generating stock in our Hedge Fund Universe in 2015, saw a decrease of hedge fund ownership by about $2.9bn, as managers may have took profits to deploy to names that were impaired during volatility in the 1st quarter. Interestingly enough, there was also $700mm of filed notional put options on the name. Are managers bearish of the valuation? Sales were precipitated by Tiger Global ($1.3bn reduction), Citadel (exit), Tourbillon (exit), and Lone Pine ($130mm trim). Meanwhile, Viking added $500mm to the name, making it a $2bn position, while Discovery doubled its position. Senator, Suvretta, Blue Ridge, and Och Ziff initiated the name during the quarter.
Meanwhile in China
Many point to macroeconomic concerns in China precipitating much of global market volatility in the 1st quarter. Unsurprisingly, there were some major movements in two of the largest ADRs2 in Chinese retail: JD.com (NYSE:JD) and Alibaba (NYSE:BABA)
JD saw a dramatic reduction in ownership ($1.7bn) over the quarter, possibly due to said fears revolving around China, or private placement lockups expiring, offering some liquidity for long-time holders. Notable buyers include Viking ($400mm initiation), OZ ($340mm add), Scopia ($152mm initiation), and Tairen (5% initiation). Tiger Global trimmed its position by over $400mm, while many funds exited (Soroban, Hoplite, Maverick, Jericho, Miura, Ariose, and Tiger Management). We model a $2.84bn loss for aggregate hedge fund holders in the stock, YTD.
Unlike JD, BABA saw a marked uptick in conviction ownership, while a reduction in aggregate ownership. This is perhaps due to its maligned valuation, but it’s rare to see owners double down on conviction in contrast to aggregate trends reducing a stock. 8 funds in our HFU own conviction positions in the stock, representing $2.1bn in conviction ownership. Funds on aggregate shed 700mm of the stock, leaving aggregate ownership within the HFU at $3bn at quarter-end.
BABA has seen gradual reduction in ownership by Hedge Funds
Top adds were driven by OZ ($146mm add), Hudson Bay, Jericho (3% initiation), LMR (5.5% initiation), and NWI (4.6% initiation). Several funds did cut their positions, including Discovery ($360mm trim), Paulson ($160mm exit), Soroban ($110mm exit) and Steadfast ($66mm exit). The trend has been a gradual reduction in quantity held by hedge funds, but those that remain do so with conviction. It will be interesting in the coming quarters to see which subset was correct.
1 – Pardon the philidor pun; we couldn’t help ourselves.
2 – Alibaba technically isn’t an ADR given its involving incorporation structure…
Today, few investors realize that, by some measures, liquidity in the equity markets is below pre-Lehman default levels. For active managers, the moderate decline in trading volumes at the exchanges masks an even greater concern. Liquidity, for active managers in particular, has receded to record lows, and is set to decline even further. The problem is that traditional liquidity measures don’t take the herding behavior of active managers into account.
Crowdedness and crowd selling is now a real risk to investors, and liquidity, or lack of such, is a primary ingredient in this risk factor. This study unpacks trends in liquidity that every money manager should understand—ignoring them could be a costly mistake.
Download our latest report to learn more.Published on May 24, 2016