So earlier this week, on the Greenlight Re call, David Einhorn stoically (I guess) admitted that things still aren’t going well. Specifically, he conceded he’s “never underperformed like this” after saying he’s in the midst of his worst stretch since March of 2000.
You might recall that last year was rough — David was up just 1.6% compared to the S&P’s mammoth gains and a 6.5% return for the average hedge fund. And January didn’t bode well for 2018 as the “bubble basket” continued to get more “bubbly”.
Although David said the portfolio performed “as expected” in February given the long positions, he went on to say that things are nonetheless still “difficult”. About the best he could come up with was that he “didn’t underperform materially” this month.
Well in a testament to the relative merits of doing the opposite of what David has been doing by simply riding the wave in the bubble stocks (with leverage) at a time when nothing makes any sense, Goldman reports that their “vaunted” Hedge Fund VIP list of the most popular long positions “atypically outperformed during the [recent] drawdown and has led the S&P 500 by 170 bp YTD (3.5% vs. 1.9%).”
Basically, hedge funds refused to rotate away from growth and momentum plays in Q4 despite an environment where tax reform seemed to suggest that the tide was turning in terms of what stocks were likely to take the baton going forward. Here’s Goldman:
Tax reform and rising Treasury yields weighed on Technology and other fund favorites in late 4Q. Although funds trimmed their Tech overweight, the sector remains the largest net portfolio weight (24%) and the bulk of our VIP list (38%). Financials remains the largest net underweight (-445 bp); portfolio turnover hovered near record lows. The steady-handed approach — maintained during the correction — has fared well in early 2018, with our long/short momentum (+6%) and growth (+2%) factors and the Tech sector (+6%) all outperforming YTD.
As the bank goes on to write, the behavior of the VIP basket during the turmoil was to a certain extent anomalous. “As the S&P 500 suffered its first 10% decline in two years, our Hedge Fund VIP basket declined in absolute terms but outperformed both the broad market and the largest short positions,” Goldman notes.
They continue: “This outperformance stands in contrast to the basket’s typical ‘high beta’ behavior; the most popular stocks typically underperform during market drawdowns as investor selling weighs most heavily on their top positions.”
Well not this time, dammit. Have a look at this:
It would appear that hedge funds made the right decision not to rotate out of their high beta positions in Q4 or, put differently, to simply ignore what everyone was saying about who the “winners” and “losers” would be from tax reform. Here’s a fun scatterplot:
And here’s a chart that shows how turnover (which had hit record lows) barely budged in Q4:
In case you’ve forgotten what stocks are in the VIP basket, here’s a quick refresher:
Finally, it looks to me like they’re sticking with it (and why the fuck not considering everything noted above?):
So if you were wondering how to ride out a correction, the answer in the current environment would appear to be just the opposite of what’s intuitive: stay away from the “safe” stuff and stay put it in the high-fliers because in this upside down world, high beta is now low beta and risky is now safe.