Hedge Fund That Beat the Odds in '18 Sees More Tech Pain

(Bloomberg) -- An Asia equity hedge fund that returned 30 percent last year in part by shorting factory automation stocks reckons the global tech rout has further to run.

Exchange-traded funds, which drove much of the tech rally, will unwind their holdings as companies in the sector lower their earnings forecasts, according to Andrew West, the Sydney-based managing director of Longlead Capital Australia Pty.

“There’s certainly still some massive allocation shifts from tech to other sectors, particularly Treasuries and defensives,” West said in an interview with Bloomberg Television Friday. “In the three year up cycle, multiples expanded with the ETF creation. We’re now seeing some ETF redemptions that could lead things the other way.”

Longlead’s $60 million Asia Absolute Return Fund gained over a period during which a Eurekahedge index tracking Asia-focused stock hedge funds declined almost 12 percent. Tech stocks have been popular with investors in recent years because they offered significant upside in a low-yield environment. In the fourth quarter of 2018, the tide turned as money managers grew leery about the high valuations teamed with a global economic slowdown and U.S.-China trade spat.

Hedge Fund That Beat the Odds in '18 Sees More Tech Pain

The MSCI World Information Technology Index tracking stocks including Apple Inc., Facebook Inc. and Nvidia Corp. has slumped 15 percent from an August high. The gauge is still valued at 16 times estimated 12-month earnings, above the 10-year average of 15 times.

Longlead is retaining its bearish bets on factory-automation firms, expecting their clients will scale back on spending amid global economic uncertainty. One of those is Japan’s SMC Corp., whose shares last year weathered their worst period since 2008.

“Factory-automation companies are typically very cyclical businesses, exposed to global trade,” West said in an earlier phone interview. “Through the course of 2018, the slowdown and the trade tensions caused revenue growth to fall, and ultimately, earnings started to contract.”

Hedge Fund That Beat the Odds in '18 Sees More Tech Pain

Another good trade for Longlead last year was China Tower Corp. It bet the world’s largest mobile-phone tower operator would benefit from the introduction of 5G wireless technology. Longlead got in during China Tower’s Hong Kong IPO in August and has ridden a 22 percent share-price rise since.

U.S.-China trade tensions and the global economic slowdown will continue to make investment decisions in 2019 challenging, West said. There’s “a lot of confusion and a lot difference of opinion as to what could happen during the course of this year,” he said on Friday.

Longlead oversees $350 million. It also has a market-neutral fund that balances bullish and bearish bets with the aim of generating more stable returns.

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