Coatue, Winton Join Hedge Funds Damaged by Momentum Reversal

(Bloomberg) -- It came out of nowhere and hammered hedge funds. Then it disappeared.

Now we’re beginning to see the damage report.

Early September saw a massive shift from long-favored momentum stocks to value equities. In the first two weeks of the month, stock-picking hedge funds lost more than a third of the alpha, or gains above benchmarks, that they had produced this year, according to a Goldman Sachs Prime Services report.

Coatue Management dropped 5% in the first two weeks and Viking Global Investors sunk almost 2%, according to people familiar with the matter. Winton Group’s multi-strategy quant flagship fund fell 4% this month through Sept. 20, another person said.

“If you were long technology, momentum and the defensive sectors, particularly utilities, and you were short value against it, you got hurt very badly,” said Tim Ng, chief investment officer of Clearbrook Global Advisors, which invests in hedge funds.

Overall, the week ending Sept. 12 was the equity strategy’s worst in four years, the Goldman Sachs report said.

*Sept. 1-20. Sources: people familiar with the matter.

Representatives for the firms declined to comment.

The seismic shift in flows was prompted by the dovish stance of global central banks that have restarted quantitative easing, Ng said in a Sept. 20 note. U.S. consumer and labor market data signaling that a recession was far from imminent fueled a jump in 10-year Treasury yields. And the rise in rates may have spurred the rotation, according to a Sept. 11 report by Credit Suisse Group AG.

Read more on the shift away from momentum stocks here

The rotation into value stocks appears to be over, Credit Suisse said in a follow-up report on Sept. 18.

The majority of the losses experienced by clients of Credit Suisse’s prime brokerage were on the short side, where crowded positions in small, middle and large-cap names surged, its report said.

Value stocks typically perform better when the economy, inflation and interest rates are rising. Growth stocks tend to be preferred when expansion is moderate and inflation is falling.

--With assistance from Nishant Kumar and Melissa Karsh.

To contact the reporters on this story: Hema Parmar in New York at hparmar6@bloomberg.net;Katia Porzecanski in New York at kporzecansk1@bloomberg.net

To contact the editors responsible for this story: Alan Mirabella at amirabella@bloomberg.net, Vincent Bielski, Josh Friedman

©2019 Bloomberg L.P.