Omega, Pershing Confident of Stock Picks Even as Gains Disappear

As the stock market plunged 5 percent in the first five minutes of trading on Monday and spent the next 48 hours in free fall, selling wasn’t on the minds of the traders at Leon Cooperman’s Omega Advisors.

“We were fully invested going in and we switched out of some companies and added to others,” said Steven Einhorn, vice chairman of New York-based hedge fund firm. “If you believe the selloff was not fundamental and you have good companies, you stick with them.”

Watching more than $2.2 trillion get erased from the U.S. equity market hasn’t been much fun. Omega, which manages $8.9 billion, and Pershing Square Capital Management, which oversees $20.2 billion, saw their gains for the year wiped out during the worst of this week’s tumble. The managers remain confident of their stock picks.

Bill Ackman’s Pershing Square had been up 7 percent through Aug. 18. On Wednesday, Pershing Square Holdings Ltd. told investors in a report that all those gains had vanished. The fund reminded them that it invests in stable, cash-generating businesses with limited exposure to macroeconomic events.

“We believe these portfolio companies are well positioned to increase their long term intrinsic value, and this is not reflected in the current volatility in their share prices,” Chairman Anne Farlow wrote in a report.

Algorithmic Traders

The closed-end fund, which tracks the firm’s main hedge fund, slumped 13 percent this month through Aug. 25, leaving it down 4.3 percent year-to-date, according to the Pershing Square website.

Even Ackman’s one short position hasn’t lessened the pain. Nutrition company Herbalife Ltd., which the billionaire money manager has called a pyramid scheme, is up 14 percent this month.

For Omega’s Einhorn, the selloff had nothing to do with China’s economic slowdown, which he said has been going on for two years. In his view, it was caused by algorithmic and volatility traders, or managers of risk parity funds, none of whom pay much attention to the underlying health of individual companies.

Other well-known funds may be facing losses. David Einhorn’s Greenlight Capital was already down 9 percent this year through July. While Einhorn hasn’t reported returns to his investors, his long positions in U.S. stocks, based on filings as of June 30, suggest a decline of about 16 percent in those shares so far in August if those stakes haven’t changed. Einhorn’s gold position should have helped counter those declines, with the bullion gaining about 2.8 percent this month.

Average Fund

The average stock manager has been more successful at protecting capital than these big names so far this month. Equity hedge funds have slumped 4.5 percent this month through Aug. 26 and lost 2.5 percent this year, according to the HFRX Equity Hedge Fund Index. Even so, the index is headed toward its worst month in about four years.

Some managers saw this week’s carnage as a buying opportunity. Reza Ali, founder of $1.6 billion credit hedge Prosiris Capital Management, said he “moderately” added to energy and financial holdings and plans to boost his stakes in energy, emerging markets and distressed debt in the coming weeks when he expects prices to dip again.

Omega traders continue to watch.

“We are not doing anything right now -- we want it to settle down,” Einhorn said.

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