Position Crowding

Smart Money Insights: Weekly Brief June 29

Brexit Fallout: Financial The financial market’s response to the Brexit decision was swift and dramatic—and the aftermath continues. In the first two days following the referendum, the Stoxx 600 index fell nearly -11% while the S&P 500 declined -5.3%. The pound sterling lost -11.1% against the U.S. dollar and -14.6% against the Japanese yen. Meanwhile, traditional haven assets such as gold and the 10Yr Treasury rallied 5.4% and 1.9% respectively. Two days following the referendum, Fitch and S&P cut the U.K.’s credit rating to AA while Moody’s lowered the U.K.’s credit rating outlook to negative. Bond investor Bill Gross anticipates …

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Valeant: Position Crowding, Intrinsic Value – an Update

In January, we wrote a post on Position Crowding and Valeant – the poster child in 2015 for a crowded hedge fund name.  One of the points we made was that “intrinsic value” can be highly uncertain when it’s based on forecasts of earnings and cash flow.  We expanded on this when we wrote about how value investing had changed – from asset based analysis that (still, generally) underpins the Value factor to the concept of “private market value” (see Is Warren Buffett a Value Investor? and Why Apple is Not a Top Ten Holding of 93% of Hedge Funds).  …

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Smart Money Insights: Weekly Brief June 7

Pay to Lend Fitch Ratings recently highlighted that global negative yielding sovereign debt topped $10.4 trillion in May, an increase of $500 million from the prior month. Much of the increase was driven by yield declines in additional maturities of Japanese and Italian sovereign bonds. In Japan, quantitative easing and negative interest rates instituted by the Bank of Japan have contributed to negative sovereign yields. In Europe, weak inflation and manufacturing data along with an expansion of the ECB’s economic stimulus program have contributed to the negative yields. 17 Days until Brexit? Last week, we explored possible explanations for a …

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Smart Money Insights: Weekly Brief May 17

We’re picking up again after a lull due to intensive work on a webinar and several research topics.  First, despite a flat S&P year-to-date, active managers are having one of the worst years on record.  Second, we may be at the tipping point for hedge fund fees – long overdue and a validation of what we’ve been shouting from the rooftops for years.  Third, the equity market recovery seems to be driven by short covering – not a stable foundation.  We are working on several research projects, which will show up as dedicated blog posts.  If there are any specific …

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Smart Money Insights: Weekly Brief Apr 11

The start of the second quarter saw equity markets decline – continuing a pattern, the S&P fared better than pretty much any other index.  The whipsaws in the market this year are taking a big toll on active investors.  In March, the average large cap fund underperformed the S&P by almost 800 basis points on an annualized basis – a record going back to 1998 – and less than 20% outperformed the index – also a record low.  In some areas, like growth funds, the numbers were far worse.  Hedge funds continue to have problems with crowded trades, and technical …

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Smart Money Insights: Weekly Brief Apr 4

In the words of one hedge fund manager, “At least it’s over.”  This is the typical refrain about the first quarter – for many, what was supposed to work, didn’t.  Small mistakes led to punishing losses.  “Prudent” de-risking in February locked in losses after six weeks of relentless market declines and caused many managers to watch in disbelief as the markets recovered by the end of the quarter.  “Short covering” and unwinding of popular trades inflicted larger than expected losses on some preeminent fund managers.  Here’s a recap of what was working and what wasn’t: Recession Risk is Down Hedge …

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Position Crowding and Valeant

Position crowding is when a bunch of similar investors own a stock.  When those investors rush for the exits at the same time, the price drops a lot more than expected – perhaps to well below intrinsic value.  Note that we have published several notes on this on the Beachhead site (see Hedge Fund & Position Crowding and Equity Long/Short Post-Crisis: A Structural Analysis of the Decline in Alpha). The poster child for position crowding in 2015 was Pershing Square Capital Management, a highly regarded hedge fund.  Pershing Square ended the year down around 20%, its worst year ever and stunning …

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