#BUBBLES: “HEDGE FUND HOTEL” EDITION (PART II)

Takeaway: We think the following 16 “hedge fund hotels” are at risk of [potential] forced selling.

Today the broad U.S. equity market (Russell 3000 Index) is down -0.7%; that’s roughly in line with the two largest one-day declines since mid-October. With the stock market finally showing some signs of deceleration after arguably the most impressive centrally planned v-bottom in U.S. stock market history, it might be safe once again for hedge fund investors to tighten up their net exposures by adding some risk on the short side.

 

One place we think you should be fishing for shorts is in the context of our #Bubbles theme, which continues to flag heightened illiquidity risk across the small-to-mid cap style factor(s) in the U.S. equity market. In the context of broadly poor performance across the hedge fund industry in the YTD, we think the following 16 “hedge fund hotels” are at risk of [potential] forced selling to the extent the redemption bug bites in the coming weeks:

 

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Our screening methodology:

 

  1. Accessible: Traded on a US exchange: 14,032 stocks
  2. A known hedge fund hotel: In the top quartile of hedge fund ownership (as a percentage of float): 3,508 stocks
  3. Worth your/our time to analyze: Market cap > $1 billion: 1,309 stocks
  4. A good story that has played out to a large degree: In the top quartile of Bloomberg consensus NTM revenue revisions on a YoY basis: 246 stocks
  5. With cracks developing in the thesis: In the bottom quartile of Bloomberg consensus NTM revenue revisions on a QoQ basis: 29 stocks
  6. Hasn’t crashed yet: The percentage delta from its respective 52-week high is > -20%: 16 stocks
  1. Illiquid: The trailing 3M average daily turnover for this sample of 16 stocks is $49M. These figures compare to an average trailing 3M average daily turnover of $450M for the largest 1,000 publically traded U.S. equities by market cap.

 

When we last published this screen in our 10/16 version of this note, the list had 17 names – 8 of which were members of the energy sector. That skew towards energy has certainly contributed to the demonstrable underperformance of that basket since then.

 

Specifically, per the PORT function in Bloomberg, a basket of those 17 names on an equal-and-fixed-weight basis has posted a total return of only +411bps from 10/16 though Friday’s close; that compares to an +1136bps total return for the broader market. Remarkably, that 725bps of underperformance doesn’t even factor in today's intraday total return of -295bps for this basket.

 

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SOURCE: Bloomberg L.P.

 

Who says you can’t make money on the short side in a centrally planned up-tape?

 

Best of luck out there!

 

DD

 

Darius Dale

Associate: Macro Team


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