Q2 2021 Filings Insights
Fund managers make dramatic shifts in their positions as sectors rotate and company-specific news dominates SEC quarterly filings
Edit: August 26th, 2021. We previously implied an AUM decline for Point72 based on their 13f filings. The market value of reported securities showed negative growth over the trailing 3 years, which may be an indication of falling AUM or simply a re-direction of the focus away from US listed securities. Point72 has since informed us that AUM grew in 2018, 2019, 2020 and YTD in 2021.
In the chart below we can see the list of commonly held names within the Novus Hedge Fund Universe (HFU) saw the usual shuffling, with a couple significant moves.
Apple and Microsoft maintained their traditional first and second positions, but Bank of America slipped from third to fifth. While that name remains popular with retail investors, it was hardly the only Financials stock to lose ground within the hedge fund community. Citigroup tumbled from 33rd to 55th place. The drop was almost as steep for Wells Fargo and British mortgage lender Nationwide Building Society.
To the upside, it is hard to ignore Nvidia’s rise from 35th place to 11th. This, however, has little to do with sector rotation. It comes almost entirely at the expense of competitor Intel, which dropped from 65th to 99th. Nvidia and to some extent the other major chip maker, Advanced Micro Devices, have benefited from the surge in demand for processors tailored to the gaming and crypto mining industries, while Intel has not.
One oddball event to note is that, over the second quarter, Alphabet’s voting shares -- GOOGL -- jumped three places in the standings while its non-voting shares -- GOOG -- maintained their position. This likely has to do with the opportunity presented by GOOGL’s slightly underperforming GOOG. It’s one thing to give up voting rights if it improves your economic interest, but quite another to give it up for no benefit.
Catherine Wood & ARK
Catherine Wood’s actively managed ARK Innovation ETF could serve as a proxy for the most popular names across the broader tech universe: Spotify, Square, Zoom, Coinbase and Roku are all among its top 10 holdings, but the fund’s greatest exposure is to Tesla. Wood has definitely shown a capacity to pick winners, but does she hold them too long? Michael Burry, whose Scion Asset Management pulled off The Big Short in 2008, is among the skeptics. As of the end of June, according to the Wall Street Journal, Scion held put options worth nearly $31 million against 235,500 shares of the ETF. As careful followers of this space know, Scion has not had the greatest success with its shorts in the first quarter. Still, over the first half of 2021, the S&P 500 grew three times faster on a total-return basis than the no-dividend ARK Innovation, so taking a contrary stance is an entirely defensible position.
It bears mention that Scion’s short position wasn’t the biggest one against ARK Innovation. Another hedge fund firm Novus subscribers are well acquainted with, Steven Tananbaum’s GoldenTree Asset Management, which has made more news lately with its reported interest in cryptocurrencies, had a June 30 short position four times as big as Scion’s.
You can explore GoldenTree Asset Management on the Novus Platform for free through the end of the month on our Manager Analysis Insights Dashboard.
In addition to GoldenTree, though, sits Laurion Capital Management, which shorted 1.3 million units.
Read on, and you’ll find out at least one reason why Laurion and ARK Innovation don’t see eye-to-eye.
Other hedge funds, though, are all in on Wood’s ETF. After all, ARK Innovation did eke out a 5.1% gain in the first half while its crown jewel, its Tesla holding, dropped 3.7%. These backers include Taconic Capital Advisors, Aristides Capital and Balyasny Asset Management.
By all accounts, hedge funds are rolling in some real money lately. Not only are returns up, but so are inflows. According to a Financial Times article, this can’t be taken for granted.
“Attempting to lean against the era of super-easy central bank monetary policy has been painful, and the market tranquility it has caused robbed many hedge funds of the opportunities they crave” over the past decade, Robin Wigglesworth and Laurence Fletcher write. “Instead, they have had to watch rival private equity tycoons struggle to invest the piles of money they have raised, and trillions of dollars flow into cheap, passive index funds, some of which promise to replicate what hedge funds do at a fraction of the price.”
In their story, they note that hedge funds returned 11.8% in 2020, its best year since the 2009 bounceback from the financial crisis, and are already aiming for double digits this year as well. They suggest that some of this resurgence has to do with hedge funds returning to what they started out to do: hedge. Wasn’t the original idea to be a place for investors to park money against volatile equity markets while getting a better return than they would if they kept it in bonds? It’s hard to get a worse return than bonds right now, so hedge funds are benefitting from flows out of fixed income.
Data shop EurekaHedge notes that the funds that are gaining the most from these inflows are generally not the same as the ones posting the highest returns. That’s probably because the best-performing funds tend to be closed to new clients.
EurekaHedge also estimates that annual management fees now average 1.38% and performance fees are down to 15.9%. It was unrealistic to expect the 2-and-20 fee structure to endure much past the dotcom bubble. In this age where retail investors are trading for free, how much hedge funds can charge for their services has come under renewed pressure.
And a glance at Novus’s alpha rankings provides a clear indication why that might be the case. Let’s focus on long/short equity houses, which is where most fund managers congregate, then let’s zero in on the median performer -- that is, the 325th out of the 650 tracked. For the trailing three years, that spot is held by Pier 88 Investment Partners, which posted a -70.93 basis points of alpha; that is, it trails the broader market by the better part of one percent on an annualized basis. The same indistinction for this past quarter belongs to Exane Asset Management for its -567.48 bp annualized alpha.
That’s not to say that some fund managers aren’t shining. It’s just to say that those who are in the middle of the league tables aren’t outperforming. The top 10% of long-short fund managers all added in excess of 1,000 bps of annualized alpha over the trailing three years, led by Hovde Financial’s gaudy 46,065.64 bps annualized.
Information Technology names now comprise 24.25% of hedge funds’ portfolios, the greatest exposure to that sector in at least five years.
Of course, we’re talking about Apple, Microsoft and the rest of the usual suspects. There’s one midcap Tech stock, though that seems to hold an outsized allure for fund managers: Datto Holdings. This managed services provider -- which wisely gobbled up the ticker symbol MSP -- went on a tear from April through June and has since settled into a narrow trading range. It’s three-quarters owned by an array of 15 hedge funds and seems to be attracting more buyers than sellers.
The real ‘China virus’
The most hackneyed macroeconomic adage used to be, “When America sneezes, the world catches a cold.” Originally said by an Austrian politician about Napoleonic France, it accurately described the United States’ effect on the wealth of nations.
And now it might describe China. Let’s set aside the literal Covid-19 pandemic and stick with contagion as a metaphor. China is honking out a series of policies -- some of which are directed at economic control while others have economic impacts -- and world markets are starting to run a low-grade fever.
Whether it’s the degree of control of state-owned enterprises or the People’s Bank of China’s monetary policies or the degree of self-rule tolerated in Hong Kong, it’s indiscernible to anyone outside Beijing exactly what’s to come next. And of course, the government has taken minute interest in exactly which technologies will be promoted and which will actually be subject to crackdown. Sum it all up, and you can see why the Shanghai and Hong Kong stock markets have been trending down since February.
The real issue for U.S.-based hedge funds, though, are the ADRs of companies domiciled in China. Some investors, notably the aforementioned Catherine Wood, won’t touch them.
The Securities and Exchange Commission put out a warning on Beijing’s restriction against non-Chinese ownership and the complex arrangement of offshore shell corporations the companies use to get around it.
“I worry that average investors may not realize that they hold stock in a shell company rather than a China-based operating company,” SEC Chair Gary Gensler announced July 30, calling for a litany of further disclosures and investigative actions.
While this may benefit retail investors, hedge funds had an entirely different set of problems. Emblematic of them was the cratering of DiDi Global. The Chinese ride-hailing service floated a $4.4 billion IPO -- with significant buy-in from the hedge fund community -- then faced a crackdown by its government for cybersecurity violations. When, how and upon whom Beijing’s regulatory hammer will come down seems like an almost capricious exercise. There’s an interesting article in The Diplomat that says it can be explained using a machine learning algorithm, because it can’t be explained using economic indicators or common sense.
Where others see risk, though, a hedge fund manager often sees opportunities. With Wood’s ARK Innovation betting against Chinese ADRs, it’s no surprise that one of the biggest wagers being made on them is by Laurion which, as you recall, holds the largest short position against that ETF. According to 13-F filings, Laurion recently bought $257 million in JD.com equity and increased its Alibaba stake to $700 million, while trimming holdings in the wake of the Archegos Capital Management implosion.