Hedge Fund Letters to Tell of Favorite Trades Unraveling

Photographer: Brent Lewin/Bloomberg

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Photographer: Brent Lewin/Bloomberg

Advertisements for residential property in the Zhujiang New Town district of Guangzhou, Guangdong Province, China, on March 26, 2014.

Pity the poor folks who have to write letters to investors on behalf of equity-focused hedge funds this month.

Various measures of performance indicate the alternative investment vehicles may have a lot of explaining to do in March. The Global X Guru Index ETF (GURU), which aims to mimic returns of the top hedge-fund stock holdings, has lost 2 percent this month for its worst performance versus the Standard & Poor’s 500 Index since it was created in 2012.

Stocks tracked by Deutsche Bank AG with the highest concentration of hedge fund ownership were down 4.5 percent from March 7 through last week, while the S&P 500 was down 1 percent. Meanwhile, a Goldman Sachs Group Inc. measure of hedge funds’ favorite stocks to bet against has risen almost 3 percent this year, which is not what you want to see if you are short those stocks.

So what happened? Concern about geopolitical tensions and potential Federal Reserve interest-rate increases caused withdrawals that forced funds to reduce borrowing and dump some of their favorite positions, Dave Lutz, the head of ETF trading and strategy at Stifel Nicolaus & Co. in Baltimore, said in an e-mail today.

Hedge-fund holdings show managers were placing big bets on momentum stocks, which were hurt when investors rotated out of the best performers and into shares with lower valuations this month.

Reversal

The reversal of some favorite positions also helped emerging-market stocks and bonds by forcing funds to cover short bets. The MSCI Emerging Markets Index of stocks has gained 2.7 percent in March to trim its 2014 decline to 1 percent.

Bets against longer-term U.S. Treasuries, which seemed like a no-brainer after the Federal Reserve began tapering its bond purchase in December, also proved ill-advised in the first quarter. The short interest in the iShares 20+ Year Treasury Bond ETF jumped to a five-year high of 46 percent of shares outstanding on Jan. 13, according to data compiled by Bloomberg and Markit, a London-based provider of financial data. The ETF has rallied 3.8 percent since.

Current positions indicate hedge-fund managers and other large speculators believe the compression between longer and shorter-term yields may have further to go even after the gap between five-year and 30-year Treasury rates slid last week to the lowest since 2009.

At the same time, hedge funds and other speculators appear to be chasing the rebound in raw materials that has sent the CRB (CRY) commodity index up more than 8 percent this year. Net wagers across 18 commodities more than doubled this quarter to 1.66 million contracts as of March 25, the biggest gain since September 2010, the CFTC data show.

So to sum it all up for hedge funds: March came in like a hot rod made by Tesla Motors Inc., which reached a record March 4 and has tumbled 18 percent since. It went out like lean hogs, which are up 19 percent for the month.

Put that in your month-end letter.

To contact the reporter on this story: Michael P. Regan in New York at mregan12@bloomberg.net

To contact the editors responsible for this story: Chris Nagi at chrisnagi@bloomberg.net Laura Zelenko, Jeremy Herron

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