Hedge Fund Crowding Toll: January 2015

Several of our articles discussed the vulnerability of crowded hedge fund positions to volatility, mass liquidation, and losses. We illustrated specific blow-ups (SanDisk (SNDK) and eHealth (EHTH)), as well as sectors with persistently poor hedge fund performance (Oil and Gas Production and Miscellaneous Mining). However, we have not showed how representative these examples are. This piece illustrates the […]

Hedge Fund Crowding Costs – eHealth

EHTH (eHealth, Inc.), an Internet health insurance agency, was down over 50% following disappointing revenue and EPS guidance. The events were yet another example of the mass sell-offs in crowded hedge fund bets after disappointing news. This once again demonstrates that investors must monitor their portfolios for crowding. EHTH was not the largest stock-specific hedge fund […]

Hedge Fund Crowding Costs – SanDisk

SanDisk (SNDK) was down 14% following a disappointing pre-announcement. This is a common occurrence for crowded ideas: SanDisk is the most crowded hedge fund bet in its sector, and crowded hedge fund Electronic Components picks tend to do poorly. These events illustrate crowding costs, particularly in the areas where hedge funds display a persistent lack of skill. […]

Hedge Fund Internet Software Crowding

Hedge funds tend to pile into the same few stocks. In most sectors these crowded bets underperform. In previous articles we discussed the crowding of hedge fund energy as well as exploration and production bets. Internet software stocks show similar underperformance. Hedge Fund Internet Software Aggregate If markets were flat since 2004, the aggregate position-weighted hedge fund internet software portfolio (HF Aggregate) would […]

Hedge Fund E&P Crowding History

As we have discussed in earlier articles on hedge fund energy as well as exploration and production crowding, funds pile into the same few stocks. Over time these crowded stocks tend to underperform. The following video shows the most crowded hedge fund E&P stocks over history, and their historical risk-adjusted performance: The information herein is not represented or warranted to […]

Hedge Fund Crowding Costs – Energy

In recent articles we discussed shared long bets among U.S. hedge funds – a phenomenon called “crowding” – without quantifying its consequences. Crowding is costly to investors, fund managers, and allocators. A prime example of this is the Energy Sector: Over the past 10 years the aggregate hedge fund long energy portfolio (HF Energy Aggregate) delivered negative […]

Top Stock Pickers’ Exposure to Valeant

In Early – Out Just in Time Our recent article established that a portfolio of skilled stock pickers’ ideas generates consistent alpha.  This brief analyzes what the AlphaBetaWorks Expert Aggregate had to say about one controversial name, Valeant Pharmaceuticals (VRX).  In short, the smart money was in early and left almost a year before Valeant’s recent headaches. […]

Systematic Hedge Fund Volatility

Hedge fund replication, tracking, and analysis often focus on the individual positions and on the stock-specific risk they contribute. This overlooks the far more important return source – systematic hedge fund volatility. A statistical equity risk model that robustly captures exposures to the key systematic risk factors delivers 0.92 (92%) correlation between predicted and actual […]

Hedge Fund Industrials Factor Timing

In an earlier post, we discussed the largest bets hedge fund long portfolios were making in Q1 2015. The third largest was on the Industrials Factor. This is the risk specific to the industrials sector after controlling for market exposure. It captures capital allocation to industrials and sensitivity (beta) to the sector. There is weak […]

Hedge Fund Oil Factor Timing

In an earlier post, we discussed the largest bets hedge fund long portfolios were making in Q1 2015. The second largest was on the oil price. This exposure is the residual oil price risk after controlling for market and sector exposures. It captures overweighting within various sectors of companies that out- or underperform under rising […]