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"Hedge Fund Hotels" Blow Up: September Slams Billionaire Stock Pickers

In August, hedge funds blamed risk-parity funds for their dramatic underperformance.

In September, the underperformance continued however this time, with risk-parity funds supposedly buying stocks, one can't blame them. To be sure, some such as Ackman whose 20 million shares of Valeant are hurting badly, will blame the Martin Shkrelis of the world for the biggest biotech tumble in years, but others may have to bite the bullet and admit it is their own lack of ability to come up with alpha in a centrally-planned "market" that is the reason.

That, and idea "clustering", of course, because over the past few years the best performers have been the "hedge fund" hotels - stocks that have dozens if not hundreds of hedge funds invested and piggybacking on each other. The problem is that in the past two months it was the hedge fund hotels that have led to the biggest losses. Even the mainstream media finally discovered this little "short cut" to creating if not alpha, then levered beta.

A few days ago, Reuters reported that "new data shows that some of the industry's biggest firms' top 10 stock picks bear striking resemblances to each other."

You don't say....

The same four holdings appear on the top 10 lists of John Paulson's Paulson & Co and Nehal Chopra's Ratan Capital, according to a report Symmetric IO released on Monday.

 

The data also showed Coatue Management had five of the same top 10 picks as Whale Rock Capital Management, and four listings in the top 10 list of Stephen Mandel's Lone Pine were also on Chase Coleman's Tiger Global chart.

 

Symmetric, which tracks more than 1,000 hedge funds, calculated its findings based on their second-quarter U.S. stock holdings, which they reported to the Securities and Exchange Commission on Aug. 14.

The report was confused: "There is no obvious reason why these funds are in the same stock names, but identifying the fact that they are is very helpful to hedge fund investors," said Symmetric Managing Director Sam Abbas. "Investors try to search out the best hedge funds, and suddenly they find that these firms are invested in the same top names."

Actually, there is precisely zero confusion why hedge funds cluster in the same names: it's called idea dinners, in which one "analyst" comes up with a "brilliant" idea (such as Glencore, where nobody apparently even read the company's annual report) and then 10-20 others follow right in. Incidentally, it is precisely this type of "activist" hedge fund idea dinners that the SEC is currently probing following our report from August of last year "Is The SEC Asking These Hedge Funds Why They All Rushed Into Allergan Last Quarter?"

And now that the SEC is looking into hedge fund hotels, so are hedge fund investors who are suffering dramatic losses.

Here is Reuters with a follow up on some of the most prominent funds that supposedly "hedge" doing anything but that.

Billionaire stock pickers David Einhorn, Daniel Loeb and Barry Rosenstein on Wednesday told their wealthy investors they lost money in September as market turmoil inflicted more pain on some of America's most prominent hedge funds.

 

The three men were among the first to tabulate their monthly performance numbers and their losses suggest that even bigger declines will be reported by other hedge funds in the days ahead, after global markets tumbled this month amid persistent fears that China's economy is slowing.

 

Einhorn's Greenlight Capital fund fell 3.6 percent in September, leaving the $11 billion firm off 17 percent for the year to date, two people familiar with the figures said on Wednesday.

 

Loeb's $17.5 billion Third Point fell 4.8 percent in September. It is down 3.7 percent for the year while his more aggressively positioned Third Point Ultra fund lost 6.7 percent, putting it off 7.5 percent for the year, a person familiar with the numbers said.

 

Rosenstein's $11 billion Jana Partners lost 3.8 percent in September and is now off 6.6 percent, a person familiar with the numbers said.

 

Einhorn is now on track to post his first down year since the financial crisis in 2008 - a big blow for a manager who had been delivering average annual returns of about 20 percent.

The causes for the pain? Why the "hotel" names of course, those companies in which everyone had been invested because "they worked" on the way up. They are no longer working.

At Greenlight, Einhorn is delivering some of the industry's worst numbers, thanks largely to soured bets on renewable energy company SunEdison and Consol Energy, and a losing gamble on Micron Technology.

 

Rosenstein's biggest bets on Qualcomm, Walgreens Boots Alliance and Hertz all saw losses, and he was also hurt by a 24 percent sell-off in pharmaceutical company Valeant.

 

At Third Point, declines in Amgen and Allergan weighed on performance.

All those names are very familiar to anyone who has watched the most popular names among the hedge fund community (with AAPL of course in the top position for years):

But more than even idea and thesis clustering, the biggest culprit for the performance collapse is the Fed itself, which for years had been the market's Chief Risk Officer, giving alpha-deficient hedge funds the ability to more than make up for their inability to come up alpha by levering beta and hoping nobody noticed (even though we have been showing precisely this for years most recently in "What "Smart" Money? Hedge Funds Underperform Market For Seventh Straight Year")

Well, now that the Fed is starting to lose control of the markets, people - and especially hedge fund LPs - are noticing, and they are not happy.

It remains unclear if following significant losses for such marquee names as Greenlight, Third Point and Jana, not to mention Pershing Square, LPs will unleash the redemption requests. Because in a market as illiquid as this one, that alone may be sufficient to put up the dreaded "hedge fund" gates for the first time in 7 years, resulting in the infamous tide going out and revealing a whole lot of naked billionaires.