Some hedge funds face steep losses after betting on hot sectors

BOSTON (REUTERS) - Hedge fund investors are bracing for a river of red ink as firms begin reporting returns for May when the stock market hovered near bear territory on disappointing earnings and worries about aggressive rate hikes, investors and fund managers said on Thursday (June 2).

Data from Hedge Fund Research shows the HFRX Global Hedge Fund Index slipped 1 per cent in May, leaving it down 3.31 per cent for the first five months of 2022. But preliminary numbers from some firms show far bigger losses, especially at funds that invested heavily in technology and biotechnology stocks.

The broader S&P 500 index ended around flat for May, with the Nasdaq index down 2 per cent. However, during the month, the S&P fell so far it nearly hit bear market territory. For the year to date, the S&P is down 12 per cent and the Nasdaq is down 21 per cent.

Tiger Global, one of the industry's biggest firms, lost 14 per cent in May, leaving it down 52 per cent for the year, an investor said. The firm has lost money every month this year after slipping 7 per cent in 2021.

Similarly, RTW Investments, one of the industry's hottest biotech funds, told investors that performance estimates for its RTW Flagship Fund, including designated investments, show the portfolio losing 9.51 per cent in May. For the year, it has fallen 34.5 per cent.

Life sciences and biopharma hedge fund Perceptive Advisors lost 19.4 per cent in May, leaving the fund down 41.5 per cent for the year following on the heels of a 28 per cent drop in 2021, according to an investor update.

For many fund managers, the damage began long before May when former market darlings reported unexpectedly poor returns. Netflix in April said it lost subscribers for the first time in a decade, sending its share price tumbling 35 per cent in one day.

Billionaire investor William Ackman, who banked three years of very strong returns, was caught in the drop and made an abrupt U-turn by liquidating a three month-old US$1.1 billion (S$1.5 billion) bet on Netflix and locking in a US$400 million loss. In May, Mr Ackman's Pershing Square Holdings portfolio lost 9.5 per cent, leaving the fund down 18.2 per cent for the first five months of 2022.

It was also the month where Melvin Capital, once one of the industry's best performers, announced that it was going out of business after being skewered by wrong-footed bets on meme stocks like GameStop in early 2021.

But not all prominent fund managers are suffering.

Mr David Einhorn, who made headlines years ago by betting that billionaire Elon Musk's electric vehicle maker Tesla would fall, is sitting on double-digit gains this year, according to an investor. Mr Einhorn's Greenlight Capital gained 4.8 per cent in May and is up 20.9 per cent for the year, buoyed by gold investments, macro bets and betting that unnamed companies would fall.

Indeed, some smaller hedge fund managers said they expect to see cash inflows as some hedge funds have proven themselves adept at betting against certain securities by shorting.

Investors said it might take longer than usual to get numbers for May as firms are pricing illiquid securities. As the market turned against them, equity hedge fund managers cut their use of borrowed money, or leverage, to try to insulate against steep falls, investors said.

Long-short hedge funds, which bet on stock prices rising or falling, have deleveraged by between 15 per cent and 20 per cent since January, considering both their long and short positions, according to data from two prime brokerages, taking their clients' portfolios as reference. Most of the de-risking occurred between February and April, one source said.