Hedge funds, the “smartest money on Wall Street” are finding it hard to beat the market.
Fund managers, which charge high fees for their investing prowess, often make millions even if the funds underperform. Several did indeed underperform last year causing some big funds to close shop and return investors’ money.
In the first nine months of 2015, 674 hedge funds were liquidated — higher than the 661 that closed in 2014. SAB Capital that managed $1.1 billion decided to close at the end of 2015 after losing 11 percent in the first eight months of the year. Seneca Capital had managed $500 million, until it too decided to shut down and return money to its investors.
Many retailers find that their stocks are held in the portfolios of some of these troubled hedge funds. Nevsky Capital was up 0.4 percent for 2015 and decided to close its doors. It is blaming its investing challenges on over stated data on China and India’s economy and computerized trading. Nevsky will be the latest to unload its positions, which include retailers like The Gap and e-commerce sites eBay and IAC/InterActive.
Greenlight Capital, which is down 20 percent as of Dec. 20, holds 1.2 million shares of Dillard’s and more than seven million shares of Michael Kors. Glenview Capital has dropped 17 percent as of Dec. 20 and the fund has 4.3 million shares of PVH Corp.
To be fair, it isn’t the retail positions necessarily dragging down the hedge funds performance. “I think that generally speaking, most hedge funds do somewhat more trading than investing and if you’re an investor, this could be an excellent time to buy retailers and apparel manufacturers,” said Lawrence Leeds portfolio manager of Buckingham Capital Management, a hedge fund that specializes in retail investments.
For example, by the middle of November, Melvin Capital was up 40 percent since opening just last year. Melvin Capital has a whole host of retail names in its portfolio. They own 1.5 million shares of Gildan Activewear, 1.2 million shares of Lululemon and 1.1 million shares of Hanesbrands.
Melvin Capital Retail Holdings as of the Nov. 16 SEC 13 F filing:
Some retail stocks have been big winners for the hedge funds. Cosmetic chain Ulta was up 44 percent in 2015. The top hedge fund owner was Lone Pine Capital with ownership of 5 percent and 3.2 million shares and D.E. Shaw with 485,190 shares.
Nike had a great 2015, and rose 30 percent for the year. Top hedge fund owners included Landsowne Partners with more than 17 million shares, Lone Pine Capital with more than 11 million shares and Blue Ridge Capital with 1.005 million shares.
Leeds thinks that even with the volatility in today’s markets, it’s a good time to get into retail names. “The two prime factors that affected business this past year were the weather and the strong dollar. It’s supposed to be quite cool next fall with the weather patterns changing to ‘la nina’ from ‘el nino.’ So the chances are a year from now, all these companies will be up against bad results from warm weather, and there’s nothing like cold to bring shoppers in stores.”
Even though hundreds of hedge funds closed last year, performances were dismal and trading for 2016 got off to a bad start with the market tanking, a new hedge fund called Key Square raised $4.5 billion. With $2 billion from George Soros, it will be the largest hedge fund startup ever. Retailers are probably crossing their fingers that fund manager Scott Bessent will look their way.