Technology Bears Miss Payouts After Giving Up on ShortsLu Wang
Bears who abandoned bets against technology companies from Facebook Inc. to Netflix Inc. in 2013 can only sit and watch now as the stocks tumble.
While the Nasdaq 100 Index plunged the most since 2011 last week, it happened as short interest in many of its biggest constituents stood at around zero, according to data compiled by Bloomberg and Markit. Shares borrowed and sold on expectations of a decline amount to 0.2 percent of Facebook’s outstanding stock and 1 percent of Netflix, down from 15 percent two years ago, the data show.
Traders who gave up on bearish bets when companies such as Baidu Inc., Akamai Technologies Inc. and Micron Technology Inc. were rallying are missing out as declines approach 20 percent. The absence of bears eliminates a group of potential buyers and shows how concerned hedge funds had become in the last year that short sales were hurting their returns.
“Most people told me they’re scared to death to short,” said John Thompson, the chief investment officer at Chicago-based hedge fund Vilas Capital Management LLC, which is betting on losses in Facebook and Netflix. “They’re acting on fear instead of logic.”
The lack of short-sellers is contributing to conditions that have kept stocks from rebounding, according to Rick Bensignor, head of trading strategy at Wells Fargo Securities in New York. In the past year, rallies have picked up speed as bears decided to buy back stock they’d borrowed and sold, a process known as short covering.
“You have a one-sided market,” Bensignor said in a phone interview on April 11. “It’s much easier for the market to decline.”
The Nasdaq 100 fell 2.6 percent last week, sinking a third time for the longest streak since 2012. The Standard & Poor’s 500 Index slipped 2.6 percent for the week as profit at JPMorgan Chase & Co. trailed estimates and analysts cut earnings forecasts.
The S&P 500 climbed 0.9 percent to 1,831.16 at 11:17 a.m. in New York while the Nasdaq 100 advanced 1.2 percent.
Since April 2, the gauge dominated by technology companies has decreased 6 percent, as stocks with the most hedge-fund ownership dropped twice as fast as the rest of the market. The Nasdaq 100, tracking firms from Facebook to Amazon.com Inc., slumped 3.1 percent on April 10, the most since November 2011.
Bears burned by rising equities cut wagers against computer and software makers by more than half in the past five years.
Short interest on technology firms in the S&P 500 averages 2.4 percent, near the lowest level since at least 2006, according to data compiled by Bloomberg and Markit, a London-based provider of financial data. That’s down from 5.6 percent at the bear market’s bottom in March 2009.
Facebook, based in Menlo Park, California, tumbled as much as 21 percent during the March-April selloff while bets against the largest social network accounted for less than 0.1 percent of the shares outstanding. Its short interest peaked at 15.2 percent in August 2012, just before the stock bottomed to begin a 306 percent advance over the next 18 months.
Netflix’s short interest has fallen to 1 percent from 23 percent in November 2012. After surging almost 300 percent in 2013, shares of the Los Gatos, California-based online movie provider have plunged 28 percent from a March peak.
“You had a crowded trade in this area and unfortunately it wound itself back,” James Abate, who oversees about $1 billion as chief investment officer at Centre Asset Management in New York, said in a phone interview on April 10. “It’s a combination of momentum working and essentially most of the large hedge funds being very concentrated in their long bias.”
With their short sales all but non-existent, hedge funds are being burned by bets equities will rise. The Global X Guru Index exchange-traded fund, which tries to replicate hedge fund holdings, is down 6.2 percent since April 2, compared with 4 percent for the S&P 500.
The HFRX Global Hedge Fund Index slipped 0.2 percent in March for a second monthly decline this year. Paul Tudor Jones, Michael Novogratz and Louis Bacon, managers that profited in 2013 from bets on macroeconomic trends, posted losses in the first quarter.
Pressure may be mounting on professional speculators with losses in individual stocks spurring more pain than they do for others. The average hedge fund has 63 percent of its assets invested in the 10 largest holdings, twice as much as mutual funds, according to a Goldman Sachs Group Inc. note from Feb. 20. About 28 percent of their holdings changed in the fourth quarter, an all-time low.
S&P 500 stocks that are most popular among the speculators have fallen an average 7.5 percent since April 2, almost double the loss in the U.S. equity benchmark.
Hedge funds make up more than 30 percent of the shareholders in Allegion Plc, Dollar General Corp. and Constellation Brands Inc., the most among companies in the S&P 500, data compiled by Bloomberg show.
About 37 percent of Allegion shares are owned by hedge funds. The Dublin-based maker of security systems is down almost 9 percent since April 2. H&R Block Inc., a tax software provider from Kansas City, Missouri, is down 11 percent and is about 27 percent owned by hedge funds.
“If you have a lot of people and a lot of lower-conviction holders and everyone is super growthed-up, it doesn’t take much of a catalyst for it to start to unwind,” Eurof Uppington, Geneva-based technology portfolio manager at Lombard Odier Investment Managers, said by phone on April 11. His company oversees $50 billion. “And that seems to be what is happening.”
This isn’t the first time investors in technology shares have faced falling markets. In the past year, the Nasdaq 100 declined 5.2 percent between Jan. 22 and Feb. 3, slipped 3.4 percent from Oct. 2 to Oct. 9, and dropped 6 percent from May 17 through June 24. Each time, the index was above its previous high within a month of reaching the bottom.
While the retreat over the past month came as a surprise, it’s likely to be short-lived again as consumers crave for new technology developed by companies such as Google Inc., said Virginie Robert, co-founder of Constance Associes in Paris.
“Would you decide tomorrow not to use Google, or to leave your smartphone at home?” Robert said by phone on April 11. “We are in a moving, innovating world, and you can’t go against that.”
Stocks with the highest valuations have borne the brunt of the selling since March. Amazon.com, the world’s largest online retailer, and Facebook were among six Nasdaq 100 companies trading at more than 100 times reported earnings at the beginning of April. Their stocks fell an average 18 percent, data compiled by Bloomberg show.
Baidu, a Chinese Internet-search provider, slumped 22 percent during the month through April 7 while short interest on the Beijing-based company has fallen to 0.1 percent from a peak 3.9 percent in July.
Wagers against Cambridge, Massachusetts-based Akamai reached a three-year high of 9.6 percent last April. After the stock jumped more than 20 percent in three of the past four quarters, the ratio has slid to 0.6 percent. The company, which helps speed Internet-data delivery for customers, has seen its stock lose 16 percent since its February high.
Micron’s short interest has dwindled to 1.7 percent from 8.2 percent in November as the stock surged for a seventh month through February, the longest stretch in almost two decades. Shares of the Boise, Idaho-based computer-chip maker dropped 14 percent in the past month.
“I’m a huge bear on the technology stocks and on the market,” Uri Landesman, the president of New York-based Platinum Partners, which helps manage about $1.3 billion of assets, said by phone on April 10. “If you’ve got patience and you’ve got the pocket, shorting a whole basket of these very high-multiple stocks is a very smart thing to do.”