(Bloomberg) — When stocks tumbled earlier this year, overwhelming some of the hedge fund industry’s most successful stock pickers with crushing losses, they rushed to unload stocks to stop the bleeding.
But that hasty retreat left Tiger Global Management, Coatue Management and D1 Capital Partners ill-positioned to capitalize on a powerful market reversal in July, when the S&P 500 recorded its best month since November 2020. At that time, they had already dumped large chunks of their portfolios and increased short bets on stocks they expected to fall.
Dan Sundheim’s D1 had net equity exposure of just 9.5% at the end of June, according to a person familiar with the matter. The company’s equity portfolio gained a relatively modest 2.9% gain in July, helping the broader portfolio achieve a monthly gain of just 1.1%. Leading hedge funds Tiger Global and Coatue were little changed in the month, the people said.
Major stock indexes, meanwhile, soared as corporate earnings held up better than expected and investors speculated that the Federal Reserve’s aggressive inflation-fighting measures were clouding the outlook for the economy. a deep recession. The tech-heavy Nasdaq composite index jumped 12%.
D1’s low net exposure suggests it was almost evenly split between long and short bets – and off-base for a broad rally.
In May, Philippe Laffont’s Coatue had reduced its hedge fund’s net exposure to 14% from around 60% a year earlier, according to an investor presentation. It was also sitting on more than 80% cash. He made the switch after underestimating the scale and speed of the stock selloff earlier in the year, the presentation shows.
Chase Coleman’s Tiger told investors this week that he also misjudged the impact of rising global inflation and was entering 2022 with too much equity exposure. The company trimmed its holdings of U.S. stocks in the first quarter, selling 83 stocks and trimming its stakes in 46 others, while adding just two new positions, according to filings. The value of his entire portfolio fell about 40% in the first quarter, reflecting both divestments and falling stock prices.
Tiger, Coatue and D1 weren’t the only ones to cut risk and miss out on gains. An analysis of 130 stock-picking hedge funds shows they cut their overall exposure to the S&P 500 by about a third between February and July — to levels not seen since September 2018, according to data from PivotalPath.
July’s rally may well prove to be short-lived, making repositioning these companies look like a better bet in the months ahead. The S&P was still down 13% this year through Thursday.
See also: BofA says taking profits on ‘Bear Rally’ as stock outflows resume
As of June, D1 was managing about $22 billion, including about $15 billion in private equity and $7 billion in equity.
July’s paltry returns followed a brutal streak for all three fund managers, leaving them deep in the red for the year. Tiger’s hedge fund fell 49.8% in the first seven months, compared to declines of 28% for D1 and 17% for Coatue. Tiger’s long-only fund plunged 62% during this period.
All managers have ties to legendary stock picker Julian Robertson and his Tiger Management. Coleman and Laffont both worked for Robertson before going on their own, and Sundheim previously worked for Andreas Halvorsen, also a Robertson protege, before starting D1.
Another Tiger Cub, Steve Mandel’s Lone Pine Capital, managed to capitalize on July’s rally, posting a 7% gain for the month. This reduced the fund’s decline for the year to 33%.
In his May investor presentation, Coatue said he went into the silver for peace of mind, telling his clients: “Our job now is to figure out when and how to start playing on offense. “
(Updates with PivotalPath data in eighth paragraph.)
©2022 Bloomberg LP