While U.S. equities (SPX) have logged solid gains so far in November, the Nasdaq led losses on Friday, a reminder that big-cap tech, which suffered its worst month since 2008 in October, remains on shaky footing.
Indeed, the Nasdaq 100 is lagging the S&P by 1.5% this month, as stocks attempt to recoup last month’s drawdown. This would mark the third consecutive month of underperformance, the longest such stretch since 2013.
The FAANGs are a train wreck, plain and simple. The most crowded trade on the planet is starting to crack after a year that’s seen a number of false starts, including the late March swoon tied to regulatory jitters and the late July stumble following Facebook’s earnings.
If those episodes were dress rehearsals, this looks like the real deal.
Clearly, this is a disaster for hedge funds, whose penchant for crowding into these names is well known. As a reminder, here’s the list of the names that matter the most to hedge funds – the “VIPs”, as it were:
And here’s a simple chart of the HFRX Equity Hedge Index versus the S&P, which gives you a rough idea of how this has gone off the rails of late:
We’ve spent a ton of time over the past month documenting how wild swings between Growth and Value in October hit the Long/Short crowd hard, and at an aggregate level, hedge funds lost almost 3% last month, the worst performance in more than seven years.
“Hedge funds posted declines in October as global equity markets experienced steep losses led by technology exposures”, HFR writes, in a report out this week. “The HFRI Fund Weighted Composite Index fell -2.98 percent in October, the worst monthly decline since September 2011”, they continue, adding the following granular color:
October declines were spread across all main hedge fund strategies, with the largest decline in equity market-sensitive strategies, as the HFRI Equity Hedge (Total) Index fell -4.25 percent, the worst monthly decline since January 2016. EH sub-strategies declines were driven by the HFRI EH: Energy/Basic Materials Index, which fell -8.0 percent, and the HFRI EH: Technology Index, which lost -4.7 percent.
That’s got folks worried about redemptions.
“One point brought up last night at an excellent client dinner I hosted [was] the upcoming redemption notice window for Hedge Funds, which in theory closes next week ~Nov 15th and looks to be an inevitability after the worst month for HF’s in seven years”, Nomura’s Charlie McElligott said, in his latest daily missive, before postulating that “perhaps the ‘getting ahead of redemption risk’ phenomenon could explain a large part of [Thursday’s] return to de-grossing behavior in the U.S. Equities space, with the pain-trade telltale sign of Value again outperforming Growth evident.” That “telltale” action continued headed into the weekend.
“If history is any guide, the rush for the exits will be swift and accelerate [as] clients have already pulled $11.1 billion even before funds fell into the red for the year”, Bloomberg wrote on Friday, before reminding you that “the last time the industry careened toward annual losses was in 2015, [when] clients withdrew $77.2 billion between the fourth quarter of that year and the first quarter of 2017.” Those were the largest withdrawals since the crisis.
Not everyone is in full-on freakout mode, though. For his part, JPMorgan’s Nikolaos Panigirtzoglou isn’t expecting anything too dramatic. “Although it’s too early to judge how October’s performance will affect the attitudes of investors towards hedge funds, the signs so far point to modest rather than big redemption wave”, he mused on Friday afternoon.
One person who has apparently seen enough from tech is Dan Loeb. According to his 13-F filed on Friday, Loeb liquidated his stake in Facebook and slashed his position in Netflix by a third. In a letter, Loeb said this to investors:
While current U.S. growth remains above‐trend, helped by fiscal stimulus, this positive impulse is peaking now, and will combine with an increasing drag from tightening financial conditions. We have delevered our portfolio, reduced our tech exposure meaningfully, and grown our short book. We expect to be net sellers over the next few months if markets rally.
As CNBC notes, Third Point’s YTD gain through September 30 was just 0.6%.