By Rob Copeland
The market's swoon has stung some hedge funds making
concentrated bets on energy, technology and financial shares, the
latest setback in a brutal year for stock pickers.
Claren Road Asset Management LLC, a unit of Carlyle Group LP
with $8 billion under management, is down more than 10% for
October, according to people familiar with its results, on track
for the worst month since it was formed 19 years ago.
The firm has been bruised by pullbacks in energy firms such as
natural-gas providers Cheniere Energy Inc. and Liquefied Natural
Gas Ltd., as energy prices have fallen amid concerns about the pace
of global growth. Also hitting Claren Road: a sharp decline in
Fannie Mae and Freddie Mac shares following an adverse ruling in an
investor lawsuit. Claren Road, which owns shares in the
mortgage-finance companies, called the ruling a setback in a
message to clients.
Owl Creek Asset Management LP is down 5% in October and has
doubled its losses for the year, following a tumble in technology
stocks such as T-Mobile US Inc., people familiar with the fund
said. Bets on firms such as Micron Technology Inc. have weighed on
Coatue Management LLC, down 7% year to date, according to people
familiar with the firm.
Losses this month compound the difficulties facing the industry
after a quarter in which stock-focused hedge funds on average lost
money even as broad stock indexes rose, according to fund tracker
HFR Inc.
The damage is being amplified by many hedge funds' tendency to
buy and sell the same stocks, analysts and traders said, a practice
known as herding that can boost returns when markets are rising but
lead to sharp drops when sentiment reverses.
"One person gets out, another sees the price move and then
you've got a stampede," said Faryan Amir-Ghassemi of Novus Partners
Inc., an analytics firm for institutional investors.
The hedge-fund exodus is causing some unlikely market moves.
Airline stocks typically rally when oil prices fall, cutting their
fuel costs, but shares of American Airlines Group Inc. have fallen
12% in October, while Delta Air Lines Inc. and United Continental
Holdings Inc. dropped 8.9% and 7.4%, respectively, in part, because
of the heavy concentration of hedge-fund holders of the stocks,
traders said. The steep decline mirrors an even sharper rise in the
stocks earlier in the year as hedge funds and others piled into the
industry.
One trader said a number of stock-focused funds went into
negative territory for the year at the end of last week, prompting
some to begin selling positions and turn defensive.
A closely followed list of the stocks most prized by hedge-fund
managers has tumbled 8.1% since Sept. 1, compared with a 4.8% fall
for the S&P 500, according to Goldman Sachs Group Inc. Cheniere
Energy is down 21% this month, after shares rose 326% from the end
of 2012 to this past September.
Hedge funds justify some of the highest fees on Wall Street by
promising to make money even in volatile conditions. But as the
industry has expanded--nearing $3 trillion, a threefold rise over a
decade--managers have tended to cluster into the same trades. Many
hedge-fund managers are lagging behind market indexes this year,
creating an incentive to buy or sell volatile stocks in the hope of
catching a quick rise, investors said.
Tide Point Capital Management LP, the two-year-old hedge fund
backed by industry veteran Christopher Shumway, surrendered
one-third of its 2014 winnings in the first two weeks of October,
dropping 8%, said a person familiar with the fund. Its biggest
position this year, according to filings, has been Cheniere.
"They're all playing momentum, and there's not a lot of
thought," said Brian Shapiro, founder of Simplify LLC, which helps
monitor hedge funds for wealthy individuals and institutions.
"Hedge funds should outperform in negative markets; they shouldn't
get caught."
Civeo Corp., which recently counted Jana Partners LLC and
Greenlight Capital Inc. as large holders, lost half its value on
Sept. 29 after disclosing its board opted not to convert to a
real-estate investment trust, burning investors who had bet the
stock would rise.
These slides could prove temporary. Many managers have been
salivating at the promise of more volatility, which gives them
opportunity to pounce in markets they believe to be mispriced.
Hedge-fund firm Zimmer Partners LP, one of the industry's top
performers in 2014 with a 24% gain until October's swings, this
month raised more than $100 million for a new fund that will bet on
utility stocks.
Some traders are dialing back risk. Andrew Hall, famed for his
big payday at Citigroup Inc., has whittled down most of his market
bets, reduced use of leverage, or borrowed money, and kept a larger
share of his portfolio in cash, according to investor updates.
Mr. Hall, who has long held aggressively bullish views on oil
prices, told investors that booming U.S. production had swamped
global demand and limited the potential for price gains for the
time being.
Oil prices have plummeted, down more than 20% since June. Mr.
Hall's Astenbeck Capital Management LLC posted a narrow loss last
month and is up nearly 12% through the end of September, investor
documents indicate.
Christian Berthelsen, Juliet Chung, Matt Wirz and Matt Jarzemsky
contributed to this article.
Write to Rob Copeland at rob.copeland@wsj.com
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