Monday, August 3, 2015

Red Light For Hedge Funds?

Julia La Roche of Business Insider reports, Hedge funds are getting smoked by the commodities slump:
The collapse in commodity prices has burnt another hedge fund.

Vermillion, a commodity hedge fund backed by Carlyle Group, has seen its flagship fund's assets fall from nearly $2 billion to less $50 million, The Wall Street Journal is reporting.

What's more is the fund's cofounders, Christopher Nygaard and Drew Gilbert, have left the firm, according to the report.

The fund lost 23% in 2014, according to the report. David Rubenstein and William Conway, two of Carlyle's cofounders, invested around $30 million of their own money in the fund, according to The Journal.

Carlyle did not return messages seeking comment in time for publication.

The fund is the latest specialist commodities trader to have been hit by an incredible plunge in commodity prices. The S&P GSCI commodity index, which is made up of the most liquid commodity futures, is down around 42% over the past 12 months.

On Monday, Bloomberg News reported that London-based Armajaro Asset Management will close its $450 million commodities fund after it fell around 11% in the first half of 2015.

Bloomberg also reported that Black River Asset Management is liquidating four hedge funds, including its commodities fund.

David Einhorn's Greenlight Capital and Greenlight Capital Re, the fund's reinsurer, have also been dragged down by the slump in gold prices.
No doubt about it, the rout in commodities has annihilated many commodity hedge funds and other hedge funds that got the macro picture wrong and continue to underestimate the ominous sign from commodities.

But as I explained in my last comment on Risk On/ Risk Off markets, it's not just commodity hedge funds that are struggling to survive. London-based bond-trader Mako Investment Managers LLP was a star performer in 2008 and investors poured money into its flagship Pelagus Capital Fund. But assets under management have fallen 95% since the end of 2012 due to weak returns and because investors have yanked their money.

Even hedge fund stars like David Einhorn are struggling in these markets. Reuters reports that Einhorn's Greenlight Capital slumped 6.1 percent in July and is now down 9 percent for the year after gold, one of the fund's top holdings, tumbled to five-year lows last week:
Greenlight notified clients of its returns late on Friday, according to one source who shared the numbers with Reuters.

Einhorn, who owns physical gold and called it one of his biggest bets in this month's investor letter, is now one of the first prominent fund managers to show just how deeply this month's gold rout has weighed on performance.

Greenlight, which invests roughly $11 billion, did not provide details about returns on Friday and a spokesman declined to comment.

But gold was not the only bet that hurt the long-admired investor. A 23 percent drop in Micron Technology Inc, another one of Greenlight's top long positions, also hurt as did a 4 percent drop in Apple Inc's stock price, Greenlight's biggest bet.

On Friday, gold was at $1,094.91 an ounce, down 16 percent since the middle of January and off from a record peak of $1,900 hit four years ago.

Unlike mutual funds, hedge funds are not required to disclose their monthly returns and many managers do not disclose them, so any performance numbers, especially from big name managers, are scrutinized closely for industry trends.

The broader stock market Standard & Poor's 500 index gained 1.28 percent in July.

Meanwhile Daniel Loeb's $17.5 billion Third Point fared much better this month, posting a 1 percent gain its main fund, extending the year-to-date gains to 6.8 percent, an investor in the fund said.

Traditionally Einhorn and Loeb are among the first managers to inform clients of their returns every month. Other managers may take several days to finalize their numbers.
CNBC provides more information on Einhorn's tough year thus far:
Given that stock markets have mostly rallied of late, the exact sources of Greenlight's pain weren't entirely clear. Yet two of its larger long positions, according to filings, were down substantially: Consol Energy (CNX), which dropped 24 percent; while SunEdison (SUNE), another energy company, tumbled 22 percent.

Public filings, however, typically don't reveal an investor's short, or bearish, positions — an area in which Einhorn tends to be active.

Broadly speaking, Greenlight's shorts could have been harmed by a modest stock-market rally, which pushed the S&P 500 Index up nearly 2 percent for the month. Still, one of the stocks Einhorn has been most bearish about of late (even though he hasn't explicitly said his fund is short it), is Pioneer Natural Resources (PXD).

The shale driller is one Einhorn nicknamed "the MotherFracker," and it fell on the month.

Other sizable positions in the Greenlight portfolio, including Time Warner (TWX) and Chicago Bridge & Iron Co. (CBI), were all up for July.

In a letter to investors a few weeks ago, in which he discussed his performance for the second quarter—when Greenlight fell 1.5 percent—Einhorn described the period as "a challenging quarter for finding new long ideas."

He also wrote that although the fund had some investments in the embattled Greek markets, those positions weren't of meaningful size or influence to Greenlight's overall portfolio.
At this writing, there's a bloodbath going on in the Greek stock market, especially in Greek bank shares which are all down limit down 30%. Obviously, taking big bets in Greek stocks or bonds hasn't panned out for many hedge funds.

As far as Einhorn's assertion that finding new long ideas is challenging, I completely disagree. There are plenty of hedge funds that made money in tech (QQQ) and biotech (IBB) and the wise ones shorted energy (XLE) and metals and mining (XME) because they read the macro environment right, especially in regard to the mighty greenback surging higher, the China bubble and the return of deflation.

On the short side, my favorite sector to short during strong countertrend rallies has been oil drilling and service stocks (click on image):


So is Einhorn's Greenlight Capital toast for 2015? Not necessarily. Bloomberg reports, Kingdon, Einhorn Bets on Renewable Energy Get Jolt in Obama Plan:
Just a few weeks after telling investors it’s time to cut bets on crude oil, Kingdon Capital Management looks like a seer, thanks to President Barack Obama’s plan to cut carbon emissions.

Kingdon, the hedge fund firm that generated a 13.4 percent gain in the year’s first half, boosted investments in solar companies, it wrote in a July 20 letter. David Einhorn, the president of Greenlight Capital Inc., also may see benefits: In October, he recommended buying renewable power company SunEdison Inc. (SUNE) as his firm built a stake that ranked as its third-largest U.S. public equity holding by the end of March.

Obama is set to detail on Monday the most sweeping new rules in the history of the Environmental Protection Agency. The White House said the measures will be tougher than the regulator’s previous proposals to combat climate change, potentially producing winners and losers among big investors speculating on how quickly the U.S. will shift to solar, wind and other renewable sources.
Also, as I've recently discussed, we could be on the verge of a snap-back rally in commodity and energy shares but I remain very skeptical and cautious, preferring to steer clear of these sectors:
[...] go back to carefully read my comments on Bridgewater turning bearish on China and a tale of two markets. We could be setting up for some nice countertrend rallies in Chinese (FXI), emerging markets (EEM), energy (XLE), commodities (GSG), metals and mining (XME), and gold (GLD) shares in the next few months.

How is this possible? First, if markets deteriorate further, the Fed won't hike rates this year. Second, real rates in emerging markets remain too high relative to real rates in the developed world, so expect more central bank easing in emerging markets in the near future. Third, the reflationistas may be temporarily right,  global growth will likely come in stronger than anticipated in the next few quarters, which will help boost energy and commodity shares.

But make no mistake, my long-term forecast of global deflation remains intact which is why even though I might be tempted to trade countertrend rallies in energy and commodities, I keep steering clear of these sectors in favor of tech (QQQ) and biotech (IBB and XBI).

The problem with tech, however, is that it's a concentrated few high flyers like Amazon (AMZN) which just reported stellar numbers that are driving the NASDAQ to record highs. I find the breadth in biotech is a lot better and can find opportunities in many large, mid and small cap biotechs.
I will repeat this often, biotech (especially small cap biotech) is very volatile but we're still in the early innings of a long secular bull market there. Every time Barron's, the Fed or anyone else warns of a biotech bubble, I simply ignore them and use the selloff to add to my biotech positions, which I trade and hold core positions (see my previous comment for some small cap biotech ideas).

Lastly, CNBC reports that Citadel, one of the biggest and well-known multi-strategy hedge funds, had the trading in one of the accounts it manages in China restricted by China's securities regulator, according to a company representative:
"Citadel has been actively investing in the region for 15 years, and has always maintained a constructive dialogue with regulators, including during the recent market volatility," a company statement said.

"We can confirm that while one account managed by Guosen Futures - Citadel (Shanghai) - has had its trading on the Shenzhen Exchange suspended, we continue to otherwise operate normally from our offices, and we continue to comply with all local laws and regulations."

China's securities regulator has restricted trading in 34 stock accounts for suspected trading irregularities, including abnormal bids for shares and bid cancellations that might have impacted wider market performance.

The regulator indicated it was particularly concerned over automated trading strategies.

The Chinese government has intervened massively on multiple fronts to rescue its stock market after it slumped more than 30 percent in less than four weeks following June 12. But it has struggled to produce a sustainable turnaround so far.
China's kitchen sink approach to combat the bursting of its mammoth stock bubble, which includes using its pension fund to buy stocks, has thus far been an abysmal failure. The guy coordinated all these rescue measures has a very tough, if not impossible job.

As for Ken Griffin's Citadel, I'm sure it made money on the way up and down in China. As discussed in the CNBC clip below, the performance of Citadel's hedge funds through June has been very strong. The same goes for Steve Cohen's Point72 Asset Management. Both funds are up roughly 10% in 2015, handily outperforming most hedge funds that are struggling in these Risk On/ Risk Off markets.

These markets are as good as it gets for large multi-strategy hedge funds, especially ones like Citadel, Millennium, and Point72 Asset Management which is now a family office. But remember what I keep telling you, nobody is immune when markets get clobbered, and that includes these elite funds and their larger than life managers.

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