Hedge Crunch FinancialSohn Conference Stars are the “Little Guys”
Another year has passed since the last annual Sohn Investment Conference, the highly anticipated event in which managers big and small present their investment ideas for the coming year. Once again, the most successful investment ideas come from the more modest sources, while the higher profile investors’ ideas are not as profitable.
According to a Reuters analysis, Josh Resnick, the founder of Jericho Capital Asset Management of New York, had the best overall performance of all the 11 presenters at the 2017 Sohn Conference. Resnick recommended to attendees last year to short Frontier Communications Corp. His bet against the company earned him 61 percent payoff since May 8, 2017, the date he made his recommendation.
Coming in second place was Larry Robbins, manager of Glenview Capital Management. His recommendation was a bullish bet on DXC Technology Company, which earned 33 percent since last year’s announcement.
This year’s conference, the 23rd yearly, will be held on Monday, April 23rd at the David Geffen Hall at Lincoln Center. Among the presenters will be Glen Kacher of Light Street, Chamath Palihapitiya of Social Capital, and Li Ran of Half Sky Capital.
Investing superstar David Einhorn of Greenlight is one example of a big name whose prediction turned to little gain. His recommendation last year was to short Core Laboratories NV. Sadly, for Einhorn, and anyone who followed his advice, the company gained 7.3 percent since May 8, 2017 and now, resulting in a losing position for anyone shorting the stock, like Einhorn recommended. In Just the first quarter of 2018 Greenlight was down by 14 percent.
This year’s conference will feature a stock-picking game, the Ira Sohn Stock Game. For a $100 entry fee, participants receive one million tokens to build a fantasy investment portfolio. The player with the best performance during the coming year will be declared winner and will receive two free tickets to the 2019 Sohn Investment Conference. The $100 entry fee will be used to fund the Sohn Foundation’s mission, to treat and find a cure for pediatric cancer.
For more details about the contest, go to the Sohn Conference web site.
Is Tesla the New Enron?
Photo of Elon Musk courtesy of
OnInnovation.
Some analysts are wondering if high-flying Tesla will end up being the huge disappointment Enron turned out to be: one of the biggest failures in Wall Street history.
Harris Kupperman of Praetorian Capital has been wondering out loud if Tesla is on its way to oblivion. Short-seller Jim Chanos said something similar about Tesla near the end of 2017. Kupperman has some graphic evidence to support his prediction, an overlay chart comparing Enron’s spectacular fall during the year after it hit its all-time share-price high of $90 on August 23, 2000, with Tesla’s stock’s behavior since its all-time high on September 18, 2017 of $385 per share and now.
A casual observer not looking carefully at the overlay graph might indeed think something spooky is going on, but a closer observation of the two graphs is not particularly convincing.
Here is what Elon Musk, Tesla’s fearless leader, Tweeted about what one worry-wort at the Economist stated, that Tesla will need to raise $2.5 billion to $3 billion this coming year.
“The Economist used to be boring, but smart with a wicked dry wit. Now it’s just boring (sigh). Tesla will be profitable & cash flow+ in Q3 & Q4, so obv no need to raise money,” was Musk’s response.
Kupperman was not persuaded by Musk’s assertion, however:
“He hasn’t hit on any target or deliverable with any sort of reliability for years now. Why should I believe him now?” he writes. “Remember in 2016 when he said they’d be profitable and didn’t need any more money? Or when they said that in 2017? He’ll probably be saying the same thing at the bankruptcy hearing.”
Musk supporters like Global Equities Research analyst Trip Chowdhry informed his clients a week ago that Tesla is a rock-solid investment:
“Betting against Elon Musk is not only insane but total stupidity — equivalent to committing a ‘career suicide.’”
Denver Post in Open Rebellion Against Its Hedge Fund Owner
Pulitzer Prize winning Denver Post finally decided to take action to improve what was becoming an increasingly untenable position for the 125-year-old newspaper. Over the weekend the paper went to its own opinion page declaring “News Matters- Colorado should demand the newspaper it deserves.”
This move was a response to a problem that effects newspapers all over the country as people get their news online instead of in print, creating revenue losses that are hard to replace.
Midsize newspapers like the Denver Post find their situation especially difficult. The decision was made to go public with their particular issue to try and avoid going bankrupt or just becoming irrelevant.
The main editorial blasts executives at Alden Global Capital, the paper’s hedge fund owner as “vulture capitalists.”
The editorial continued: “We call for action. Denver deserves a newspaper owner who supports its newsroom. If Alden isn’t willing to do good journalism here, it should sell The Post to owners who will.”
The Post has a weekday circulation of about 170,000 in a city of about 700,000 residents. Their website gets about 8.6 million unique monthly visits. It has won nine Pulitzer Prizes one of which was in 2013 for their coverage of the mass shooting in a movie theater in Aurora, Colorado. Alden Global Capital took control of the paper in 2010 when it bought its parent company, MediaNews Group after it went bankrupt. Alden runs the paper through a subsidiary, Digital First Media.
Readers showed support for the Post’s plight.
Longtime Hedge Fund Pennant Cap Management Closing
Alan Fournier’s 17-year-old Pennant Capital Management, with a $1.5 billion AUM is closing shop. The fund has been struggling since the 2008 financial crisis.
“While I take great pride in our long-term returns, especially in light of our consistent low risk portfolio structure, our recent returns have been disappointing,” Fournier told investors. “I have been frustrated by our inability to match our historical results and deliver appropriate returns for our investors.”
David Tepper, Fournier’s mentor, backed the establishment of the firm in 2001 with $12 million seed money. The letter to investors announcing the fund’s closing stated that the fund earned 11.9 percent annually over the life of the fund, compared to 6.4 percent growth for the same time period for the S&P 500 Index. But since 2014 until now the fund has earned only 2.4 percent.
Pennant will be converted to a family office dedicated to managing Fournier’s own sizeable wealth.
The stock market has been a frustrating place for Fournier, 56, who is a long-short stock picker, a strategy increasing difficult to make work in the brave new world of quantitative and passive investing. Others have fallen before Pennant: John Griffin closed his $6 billion blue Ridge Capital just last year after more than 20 years of management. Passport Capital, launched in 2000, was also recently closed down by founder John Burbank, saying he was facing “unacceptable” losses.
Pennant had its best year in 2007, right before the financial crisis, when it earned a whopping 42 percent. The following year Pennant lost just a bit under 2 percent at the beginning of the crisis. The fund bounced back in 2009 with a 23 percent ascent. In 2014 AUM reached a high point of about $7 billion.
February a Bad Month for Quants
This past February marked the worst performance month for quantitative hedge funds in 17 years. These hedge funds, which rely on following trends and computer-based analysis were fooled by the steady upward movement of stocks ending in a sudden downturn, one of the fastest market corrections in history.
“Commodity trading advisors” (CTAs) or managed futures funds, which surf the momentum of markets, made big bets in January based on last year’s rally, which ended in the best monthly equity fund inflows of money since 1987.
But in early February the sustained growth stalled suddenly, side-swiping trend-followers. It was the worst time for these systematic hedge funds since November of 2001.
“Trend-followers are either long or short equities on any given day. Obviously, after a significant upward move, they were likely to be long and therefore vulnerable to a quick downward move,” said Sushil Wadhwani, the head of Wadhwani Asset Management.
The reversal was so large that most quantitative trend-following hedge funds are now posting minus growth for the year. Despite the bad results some observers do not believe investors will be dissuaded from bets on CTAs.
“We don’t think investors who truly understand the strategy are nervous. They may hold off a little before allocating more to the space this year, but I’d be surprised if sophisticated investors meaningfully reduce their CTA exposure as a result of February performance,” said Marlin Naidoo, global head of capital introductions at Deutsche Bank.
Paulson Hedge Fund Circling the Wagons
The vast empire of funds under management by John Paulson’s management firm is continuing to dwindle in size with layoffs and redemptions.
Paulson’s company, once one of the largest in the sector, announced it will be returning money to investors in some of the firm’s funds including the Credit Opportunities fund. People with money in that particular fund will be able to transfer their capital to a separate holding area, or else they will have to redeem their funds. Several employees were let go as the firm cuts expenses.
About ten years ago Paulson leaped into financial stardom with a successful bet against the US housing market. That was ten years ago, today Paulson is going through a crisis which has cut his firm’s aum from a top $38 billion in 2011 to just about $9 billion today. And most of that money is Paulson’s own.
With about 90% of the money in the firm Paulson’s the question is whether he will close his firm to outside investors entirely. There are no plans underway at the moment to turn the firm into a family office, but the firm is switching its focus on to distressed debt and merger arbitrage strategies.
The loss of capital means there is less money to pay employees, and thus the flurry of lay-offs. In 2016 there were 128 employees, but today there are only 95.
“We are rightsizing the firm to focus on our core expertise in areas that are growing,” said a statement from Paulson’s office about the layoffs.
The headquarters is also being moved to the offices of Steinway Musical Instruments. Paulson bought the piano manufacturer in 2013.
Citadel’s Aptigon Lays Off 34% of Staff
One of the world’s largest hedge funds, Citadel, has shrunk the size of its stock-picking division, Aptigon.
The company fired 49 people between the end of February and early March from its two-year old unit, a loss of 34% of staff. Among the people who lost their jobs were portfolio managers, analysts, associates and others.
The downsizing is one of the largest in recent days. About half of those let go found employment elsewhere in the firm. Citadel employs about 1900 people in its hedge fund business, is headquartered in Chicago, and manages about $27 billion.
“We changed the leadership of Aptigon Capital because the prior leadership had failed to demonstrate it could generate the performance we expect from a Citadel business. We are committed to the success of Aptigon and will continue to recruit leading talent to the team,” a spokesman for Citadel explained.
Einhorn’s Greenlight Hits Red Light in February
Performing more poorly than the S&P 500 Index loss of 3.7 percent in February, David Einhorn’s main fund, Greenlight Capital, lost 6.2 percent during the same period for a total downturn of 12.3 percent for 2018.
Einhorn explained that his hedge fund was going through its worst performance in its history after losing 6.6 percent in January. Ever the optimist, Einhorn said that the situation was similar to what happened in March 2000. During that month the stock market grew by 10 percent, while Greenlight just sat, unmoving. But the next month Einhorn’s contrarian strategy began to reap benefits for his investors, while the rest of the market went through the tech bubble bust.
“While the environment has remained difficult with growth stocks accelerating their outperformance against value stocks this year including February, we think a reversion may finally be coming soon,” he told stakeholders in Greenlight Capital Re Ltd., a reinsurer that depends on Einhorn for investments.
Four out of five of Einhorn’s bets as of December 31st, 2017 have headed in the wrong direction. Two long bets, Brighthouse Financial and General Motors fell, 7.5 and 4 percent respectively. His short bets, on Amazon and Netflix are up, unfortunately for Greenlight, returning 29 and almost 52 percent.
Apple Snubbed by Hedge Funds
Apple’s headquarters at Infinite Loop in Cupertino, California, USA. Courtesy of the author, Joe Ravi, using license CC-BY-SA 3.0.
According to an assessment of hedge fund holdings compiled by Goldman Sachs, Apple Inc, is the only “big five” tech company that is not also a “top five” stock holding among hedge fund investors.
The five most-owned companies by hedge funds are Time-Warner, Amazon, Facebook, Alphabet and Microsoft. The publication lists the 50 stocks that appear most often among the top ten holdings of basic hedge funds.
Apple turns out to be the eleventh most popular holding on the list as a top ten holding in 34 funds. Amazon is a top-ten holding in 80 funds, Facebook is a top ten in 70 funds, Alphabet in 54 funds, and Microsoft in 52 funds. However, this list of so-called VIP stocks does not consider the S&P 500, where Apples huge market capitalization towers over other companies.
Several other tech companies made it to the list for the first time, including supplier for Apple, Qualcomm, JD, Booking Holdings, and Activision Blizzard. The tech sector is the most popular on the GS list, with 24%, despite the fact that funds have been selling off their tech positions in favor of biotech and pharma stocks.
Hedge Funds Lower Fees to Lure Investors
Since the financial downturn of 2007-2008 hedge funds have been under increasing pressure to keep their clients. In 2016 disgruntled investors pulled $70 billion out of hedge funds in response to poor past performance exacerbated by immodest fees.
The average management fee paid for a hedge fund investment fell to 1.56 percent in 2017 and the average performance fee shrunk to 17.3 percent. The trend of falling fees sped up in 2014, dropping an average of .13 percent for management and .78 percent for performance.
Before the crisis the fee structure for hedge funds was almost universally the famed “two and 20,” standing for 2 percent management charge and a whopping 20 percent for performance. Although many hedge funds are lowering that formula, there are still others holding on.
Lowering fees seems to be having an affect on winning back investors. In 2017 hedge funds acquired $9.8 billion in new money, helping to bring industry wide managed assets to a record high of $3.2 trillion by the end of the year.
Multi-strategy hedge funds are still more expensive that other strategies which are less work intensive, while customized fees structures are also a possibility at some firms. In some cases managers will agree to lower fees if assets grow, or if they agree to keep their money invested for a longer time frame.