Things Just Keep Getting Worse for Hedge Funds as Long Bets Sour
(Bloomberg) -- In a year when mutual-fund stock pickers are shining, their hedge-fund counterparts are bleeding.
After being burned during January’s retail-driven short squeeze in stocks such as GameStop Corp., now hedge funds are feeling the pain on the long side as well. A basket of the 50 most-popular stocks has fallen this month, while a group of the 50 most-crowded shorts gained, dealing a double blow to performance, client data compiled by Morgan Stanley’s prime brokerage unit show.
As a result, the long-short spread, a measure of the industry’s above-market returns, or alpha, has worsened after a brief recovery in February. Down almost 11% since the end of December, hedge funds’ alpha is heading for the worst year since at least 2015.
While Morgan Stanley didn’t identify any specific stocks, the latest hedge-fund filings shed some light on what positions may have added insult to injury. Churchill Capital Corp., a special purpose acquisition company, and internet stocks like Twitter Inc. and Zillow Group Inc. were among their favorites at the start of this year, according to Goldman Sachs Group Inc. These stocks are down more than 20% this month as rising yields sparked a sudden selloff in speculative names and richly valued technology shares.
“The market keeps shifting every few days or every week,” said Jeffrey Kleintop, chief global investment strategist for Charles Schwab & Co. “In many cases, hedge funds tend to be -- not all of them -- but they’re often momentum traders,” he added. “As soon as something starts to get momentum, it suddenly reverses and they get caught on the wrong side.”
The weak showing contrasts with mutual funds that just had one of their best starts to a year in a decade. Large-cap active funds beat their benchmarks by an average of 2 percentage points in the first two months of 2021, according to Bank of America.
That comparison isn’t strictly apples to apples, though. Hedge funds are evaluated on their most concentrated bets, while mutual funds are judged by the performance of all their holdings. Still, that doesn’t change the fact that professional speculators are doing poorly, at least going by client data at Morgan Stanley.
It’s a rare blunder for an industry that’s historically been good at picking stocks. Their alpha from crowded longs and shorts stayed positive in most of the previous six years, averaging more than 5%, Morgan Stanley’s data show.
“Unlike the pain seen back in January which came almost entirely from the short side, longs are now the ones weighing most heavily” on returns, Morgan Stanley wrote in the note. “Performance has been challenging over the past few weeks, with most strategies capturing little upside in the first half of March, and now capturing much of the recent downside.”
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