When equities tumbled earlier this year, saddling some of the hedge fund industry’s most successful stock-pickers with crushing losses, they rushed to unload shares to halt the bleeding.

But that hasty retreat left Tiger Global Management, Coatue Management and D1 Capital Partners ill-positioned to capitalize on a powerful market reversal in July, when the S&P 500 logged its best month since November 2020. By then they had already jettisoned large chunks of their portfolios and increased short wagers on stocks they expected to fall.

Dan Sundheim’s D1 had a net exposure to equities of just 9.5% at the end of June, according to a person familiar with the matter. The firm’s stock book gained a comparatively modest 2.9% in July, helping the broader portfolio eke out a monthly gain of just 1.1%. The main hedge funds of Tiger Global and Coatue were little changed for the month, people said.

Major stock market indexes, meanwhile, soared as corporate profits held up better than expected and investors speculated that the Federal Reserve’s aggressive moves to battle inflation dimmed the prospects for a deep recession. The tech-heavy Nasdaq Composite Index surged 12%.

D1’s low net exposure suggests it was almost evenly split between long and short bets -- and wrong-footed for a broad rally.

As of May, Philippe Laffont’s Coatue had reduced net exposure of its hedge fund to 14% from about 60% a year earlier, according to an investor presentation. It was also sitting on more than 80% cash. It made the shift after underestimating the magnitude and speed of the stock selloff earlier in the year, the presentation shows.

Chase Coleman’s Tiger told investors this week that it also misjudged the impact of rising global inflation and entered 2022 with too much exposure to stocks. The firm slashed its US equity holdings in the first quarter, selling out of 83 and trimming stakes in 46 more, while adding just two new positions, filings show. The value of its entire portfolio dropped about 40% in the first quarter, reflecting both divestitures and lower share prices.

Tiger, Coatue and D1 weren’t alone in curtailing risk and missing out on gains. An analysis of 130 stock-picking hedge funds shows they cut their aggregate 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 rally could well prove short-lived, making these firms’ repositioning look like a better wager in coming months. The S&P was still down 13% this year through Thursday.

As of June, D1 managed roughly $22 billion, with about $15 billion in privates and $7 billion in stocks.

The paltry July returns followed a brutal stretch for the three money managers, leaving them deep in the red for the year. Tiger’s hedge fund tumbled 49.8% through the first seven months, compared with declines of 28% for D1 and 17% for Coatue. Tiger’s long-only fund plunged 62% in that span.  

All the managers have connections to legendary stock-picker Julian Robertson and his Tiger Management. Coleman and Laffont both worked for Robertson before setting out on their own, and Sundheim previously worked for Andreas Halvorsen, also a Robertson protégé, before starting D1.

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

In its May investor presentation, Coatue said it had gone to cash for peace of mind, telling clients: “Our job now is to figure out when and how to start playing offense.”

Source:
courtesy of BLOOMBERG

by Hema Parmar, Katherine Burton, and Gillian Tan

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