Who had the mo-mo mojo and who was crushed by the steamroller becomes evident late in the day Thursday when filings from major hedge fund managers – those things known as 13-Fs – are released.
Hedge funds were hit hard by the decline in the likes of Twitter, Tesla, Netflix and a lot of other names that long/short investors had favored throughout 2013 and early 2014, but their substantial decline cut the legs out of a lot of leveraged managers looking to continue to profit on the big run-up in that sector.
Credit Suisse data shows that investors were generally overweight in the momentum strategy (one of a number of style baskets), especially after a stellar 2013, when stocks ran up all at once. They responded in late March by putting on substantial hedging positions to offset some of those losses and as the declines faded, performance normalized a bit more. There are still some believers (there always are when it comes to internet software and biotechnology companies) but still more investing firms are now going the other direction, boosting their short bets in these names and pulling away from the long side.
Many of these managers had maintained long positions in names as they kept falling. In recent weeks, though, investors have instead started to add to short positions – 3D Systems’ short interest is now hovering about 22 percent, up from about 15 percent at the beginning of the year, according to Markit. SolarCity has seen overall short interest utilization rates rise to about 76 percent from about 20 percent at the beginning of the year (oddly with this name, short bets were very high in 2013, but fell off as skeptics gave up in the face of the overwhelming market rally).
Netflix has been a bit less of a heavily shorted name, but it too has seen a modest increase in short bets, from just 1 percent in mid-January to about 10.5 percent as of this week, Markit data shows. It will be interesting to see if there are any that detail sudden reversals in exposure – from long to short – or vice versa.
(One notable exception to this trend is Twitter, which has seen a notable decline from its heavy short interest in recent weeks. According to Markit data, about 90 percent of the shares available for borrow were being used for such purposes on May 6; by May 12 that had dropped to about 50 percent of shares available to borrow. The reason for this is relatively easy to explain: Twitter’s lock-up period preventing certain insiders from selling expired on May 6, so there’s more available to borrow for short bets.)
That the big selloff in these names didn’t spread to the broader market in any meaningful way is the result of a few things. For one, the stocks were overvalued by most conventional and a few unconventional measures. Also, they didn’t encompass large swathes of the market the way the tech bubble did in 2000, and most other sectors of the market have remained steady on expectations for better economic growth, so the rotation to the likes of utilities and consumer staples stocks has helped offset the losses in the big momentum stocks.
And now, it’s gotten to a point where these hyper-growth names are even undervalued when compared with their historic relationship to the market. Hyper-growth names that derive more than 40 percent of their enterprise value from their future growth prospects trade at about a 51 percent premium to the broader market, per Credit Suisse figures. That’s usually 66 percent, meaning this is where buyers could step in…if they wanted.