Some Hedge Funds Face Steep Losses After Betting On Hot Sectors

Hedge fund investors are bracing for a river of red ink as firms begin reporting returns for May when the stock market hovered near bear territory on disappointing earnings and worries about aggressive rate hikes, investors and fund managers said on Thursday.

Data from Hedge Fund Research shows the HFRX Global Hedge Fund Index slipped 1% in May, leaving it down 3.31% for the first five months of 2022. But preliminary numbers from some firms show far bigger losses, especially at funds that had invested heavily in technology and biotechnology stocks.

The broader S&P 500 index ended around flat for May, with the Nasdaq index down 2%. However, during the month the S&P fell so far it nearly hit bear market territory. For the year to date, the S&P is down 12% and the Nasdaq down 21%.

Tiger Global, one of the industry's biggest firms, lost 14% in May, leaving it down 52% for the year, an investor said. The firm has lost money every month this year after slipping 7% in 2021.

Similarly, RTW Investments, one of the industry's hottest biotech funds, told investors that performance estimates for its RTW Flagship Fund including designated investments show the portfolio losing 9.51% in May. For the year, it has fallen 34.5%.

Life sciences and biopharma hedge fund Perceptive Advisors lost 19.4% in May, leaving the fund down 41.5% for the year following double digit losses in 2021, according to an investor update.

For many fund managers the damage began long before May when former market darlings reported unexpectedly poor returns. Netflix in April said it lost subscribers for the first time in a decade, sending its share price tumbling 35% in one day.

Billionaire investor William Ackman, who banked three years of very strong returns, was caught in the drop and made an abrupt U-turn by liquidating a three month-old $1.1 billion bet on Netflix and locking in a $400 million loss. In May, Ackman's Pershing Square Holdings portfolio lost 9.5%, leaving the fund down 18.2% for the first five months of 2022.

May was also the month where Melvin Capital, once one of the industry's best performers, announced plans to go out of business after being skewered by wrong-footed bets on meme stocks like GameStop in early 2021.

Maplelane Capital, which like Melvin suffered heavy losses in the first half of 2021 as meme stocks surged, is having a far better 2022. The fund gained 3% in the first four months of 2022 and is now up now up 1% through the end of May, a person familiar with the numbers said.

Other prominent funds also have something to brag about.

David Einhorn, who made headlines years ago by betting Elon Musk's electric vehicle maker Tesla would fall, is sitting on double digit gains this year, according to an investor. Einhorn's Greenlight Capital gained 4.8% in May and is up 20.9% for the year, buoyed by investments in gold, macro bets and betting that unnamed companies would fall.

Representatives for the funds declined to comment.

Indeed some smaller hedge fund managers said they expect to see cash inflows as some hedge funds have proven themselves adept at betting against certain securities by shorting.

Investors said it might take longer than usual to get numbers for May as firms are pricing illiquid securities. As the market turned against them, equity hedge fund managers cut their use of borrowed money, or leverage, to try to insulate against steep falls, investors said.

Long-short hedge funds, which bet on stock prices rising or falling, have deleveraged by between 15% and 20% since January, considering both their long and short positions, according to data from two prime brokerages, taking their clients' portfolios as reference. Most of the de-risking occurred between February and April, one source said.