Tiger cubs sting from the market road flooded with stocks, then missed the rally

(Bloomberg) — When stocks tumbled earlier this year, overwhelming some of the hedge fund industry’s most successful stock producers with crushing losses, they rushed to dump stocks to stem the bleeding.

But this rapid decline left Tiger Global Management, Coatue Management and D1 Capital Partners at a disadvantage to benefit from a strong market reversal in July, when the S&P 500 posted its best month since November 2020. By then, they had already shed large chunks From conservatives and increasing their short bets on the stocks they expected to fall.

Dan Sundheim’s D1 net exposure to the stock was just 9.5% at the end of June, according to a person familiar with the matter. The company’s stock book posted a relatively modest 2.9% gain in July, helping the broader portfolio post a monthly gain of just 1.1%. People said major hedge funds at Tiger Global and Coatue haven’t changed much during the month.

Meanwhile, major stock market indices rose as corporate earnings held up better than expected and investors speculated that the Federal Reserve’s aggressive moves to fight inflation had reduced the prospects of a deep recession. The technology-heavy Nasdaq Composite is up 12%.

D1’s low net exposure means it’s roughly evenly split between long and short bets – and the error is on the high.

As of May, Philippe Laffont’s CooTue cut its hedge fund net exposure to 14% from about 60% a year earlier, according to an investor presentation. It also had more than 80% cash. The presentation shows he made the switch after downplaying the volume and speed of selling shares earlier in the year.

Tiger Chase Coleman told investors this week that he also miscalculated the impact of rising global inflation and entered 2022 with significant exposure to equities. The filings showed that the company reduced its holdings of US stocks in the first quarter, selling from 83 and reducing stakes in another 46, while adding only two new positions. The value of its entire portfolio fell about 40% in the first quarter, reflecting both divestitures and lower stock prices.

Tiger, Coatue and D1 weren’t alone in cutting risks and losing gains. Analysis of 130 stock-picking hedge funds shows they cut their overall exposure to the S&P 500 by about a third between February and July — to levels not seen since September 2018, according to data from PivotalPath.

July’s recovery may be short-lived, which makes repositioning these companies look like a better bet in the coming months. The S&P has been down 13% this year through Thursday.

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As of June, D1 managed approximately $22 billion, with about $15 billion in the private sector and $7 billion in equities.

The paltry July returns came after a brutal stint for the three money managers, leaving them deep in the red for the year. Tiger’s hedge fund is down 49.8% in the first seven months, compared to declines of 28% for D1 and 17% for Coatue. Only Tiger’s long fund is down 62% in that period.

All directors have connections to legendary stock picker Julian Robertson and his Tiger management. Both Coleman and Lafont worked with Robertson before setting off on their own, and Sondheim previously worked with Andreas Halvorsen, also one of Robertson’s sponsors, prior to starting D1.

Another Tiger Cub, Lone Pine Capital from Steve Mandel, managed to capitalize on July’s rally, posting a 7% gain for the month. That reduced the fund’s decline for the year to 33%.

In her investor presentation in May, Kowatto said she went to the cash for peace of mind, telling clients, “Our job now is to figure out when and how to start playing.”

(Updates with PivotalPath data in the eighth paragraph.)

© Bloomberg LP 2022

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