Q2 2019 Hedge Fund Trends
Melvin Capital, General Electric, Shopify, Sea Limited, and "FAANMG" catch our attention during an initial review of filings data from Q2.
With the SEC EDGAR website crashing, it can only mean it’s that time of year: 13-F season. You’ve undoubtedly already read headlines about Bill Ackman’s latest trade, of Warren Buffett’s new favorite stock. At the Novus blog, we dig deeper into some key trends we capture by analyzing all active managers and their 13Fs. This represents some 10,000 unique securities across 3 trillion dollars of reported assets.
Highlighted Manager: Melvin Capital
Breathless coverage of hedge fund tycoons often center around celebrities such as Steve Cohen. A recent WSJ piece highlighted his firm’s linkage to one of his former employees, Gabe Plotkin. Plotkin’s firm, Melvin Capital, has been on a tear in 2019, returning approximately 47% through July, according to the article. Let’s take a look at some of Melvin’s key trades in the second quarter:
Figure 1: Top 5 entries reported by Melvin Capital
A quick look at the Novus Public Ownership module shows that Melvin has historically filed many options. Options filed on 13Fs are filed at full notional value, causing a bit of ambiguity to their true economic value, but they indicate bullishness towards the upside on names such as Salesforce.com and Alibaba by the firm. Melvin also made significant entries in names such as Anaplan – a tech favorite across many funds – as well as quality holdings such as Lab Corp and Estée Lauder.
Speaking of options, one interesting wrinkle in analyzing Melvin’s public ownership data is the preponderance of put options filed. Going back to their first filing in Q4 2014, we capture over 152 unique put options filed. Assuming those puts were fully delta notional (big if), we can calculate a hit rate on each of these trades as we do with common stock. 63% of Melvin’s put options since inception outperformed shorting their respective sector indices. Not bad in a challenging shorting environment! Here’s a list of their five largest notional puts as of this quarter:
Figure 2: Top 5 notional put options by Melvin
Highlighted Security: GE
GE has been a financial news darling for some time, stemming from the gut-wrenching performance in recent years, activists stepping in, the role of a sell-side analyst in revealing ugly truths, a charismatic new CEO with a bold turnaround plan, and now a legendary whistleblower (of Madoff fame) who has set his sights on the storied firm, comparing it to Enron. Mssr Markopolos’ report (on the linked site) does denote a disclosure stating the entity behind the website (presumably some sort of sole proprietorship), “entered into an agreement with a third-party entity to review an advanced copy of the Report in exchange for later-provided compensation. That compensation is based on a percentage of the profits resulting from the third-party entity’s positions in the securities, derivatives, and other financial instruments of, and/or relating to, General Electric Company (“GE”) (NYSE: GE). Those positions taken by the third-party entity are designed to generate profits should the price of GE securities decrease.”
That sure sounds like an arrangement with a hedge fund! While we await the drama to unfold, it may be instructive to review the players in the active management space who hold GE and what large trends occurred in the second quarter:
Figure 3: Top five hedge fund holders of GE
As we can see, Nelson Peltz’ Trian is the largest holder of GE, but sold nearly 10% of its stake during the second quarter. This is in contrast to the other top five holders who all added during the quarter, or in the case of Adage, entered. A few funds exited the stock during the quarter, including Masters Capital, Paloma Partners, BlueMountain, and Davis Select Advisers. Good timing! Bronte Capital (who knows a thing or two about frauds) is another holder of GE and has already responded to Markopolous’ report. This will be a fascinating story to watch as it unfolds.
Highlighted Security: Shopify
Shopify has been one of the top-performing large cap stocks of 2019, returning an astounding 129.60% through July, and 154.82% YTD as of the time of this writing. They’ve seemingly been everywhere, previously attracting notice from activist shorts. More recently, their cerebral CEO has made a tour across the podcast circuit. With a stock that has been so straight up and to the right, the propensity for active managers to be driving a lot of the buying was on the wall, and we unsurprisingly saw many hedge funds accumulate large positions in the stock in the second quarter:
Figure 4: Top five buyers of Shopify (across all institutions)
The top buyer of SHOP for the quarter was Lone Pine Capital, which accumulated over $450 mm of the stock. Two Sigma wasn’t far behind, buying about half of that. Other entrants included D.E. Shaw, Hitchwood Capital, and GQG. A few longer-term holders took the opportunity to trim their positions. These include Renaissance Technologies, Whale Rock, and Citadel.
Highlighted Security: Sea Limited
Another high flyer is Sea Limited. While SE is a South-East Asian company, American Depository Receipts (ADRs) are filed by managers on 13Fs. Sea has been in the crosshairs for many funds searching for growth in emerging trends like gaming. Friend of the firm Kerrisdale Capital laid out the case for SE presciently in January 2019. Like SHOP, SE has had a torrential rise in 2019 alongside en vogue growth stocks. The stock was up 193% through June and an eye-glazing 210% through July! This didn’t stop fund managers from adding into the name:
Figure 5: Top five hedge fund adds in Sea Limited
Sachem Head initiated the name in the second quarter, while Newbrook ramped up their position. Whale Rock entered, while Kora and Senator doubled their holdings. SE represents a huge percentage of the publicly disclosed portfolio of Kora.
A couple managers took the opportunity to crystalize gains. These included Farralon, which sold over $100mm of their holding (about half), while Segantii and Two Sigma exited. As we mentioned Kerrisdale, we would be remised not to note that they trimmed their holding by about a third. It still remains a large publicly reported part of their portfolio.
Highlighted Trend: FAAMNGs
Antitrust, the bane of the platform company, has begun to rear its ugly head. In the second quarter, rumblings around increased antitrust enforcement of Silicon Valley tech giants began to emerge. The Wall Street Journal first reported about the DOJ’s crosshair on Google/Alphabet in late May, sending the stock down. Since then, DOJ has gone on record to question the nature of antitrust in this new era of internet tech giants.
We were eagerly awaiting Q2 filings to understand how active managers – especially hedge funds who are paid to read the tea leaves – would react. What we saw was a significant lightening of risk exposure across all FAAMNG stocks, save one: Alphabet.
Figure 6: Net Purchase ($) of FAAMNG stocks versus their 2Q19 performance
With Google already reeling from antitrust worries, it perhaps enticed funds to pile into the name. Funds that loaded up did well with Alphabet’s strong Q2 reported earnings. Funds that added to the name include TCI, which increased its position by ~$1.25bn. Other notable adds include Skye Global, Manikay, Appaloosa, and Deccan Value. Funds that exited their Alphabets (sorry) during the quarter were Lone Pine, NWI, and Suvretta. They perhaps saw the writing on the wall in April and saw to the exits.