The Morning Brief: Profit Falls at Former Hedge Fund Favorite Apple

Former hedge fund favorite Apple reported a 27 percent drop in profits for the quarter on Tuesday afternoon and its second consecutive quarter of revenue losses. Net income slumped to $7.8 billion from $10.68 billion in the year-ago quarter, mostly due to slowing demand for iPhones. But the tech giant’s stock traded up after hours, rising 6.5 percent to $102.96 per share, because the poor performance was still better than analysts had expected. Apple, which has experienced a 22 percent drop in stock price over the past year, has lost some famous admirers in recent months, including Carl Icahn, who said he had exited the stock in April, and quite a few hedge fund holders. But some big managers have stuck it out. Apple was the largest position of David Einhorn’s Greenlight Capital as of the end of the first quarter, accounting for 15 percent of the hedge fund firm’s long book. Apple experienced a bit of an improvement in sales when it launched a less expensive new iPhone model in March, but the company sold 7.5 million fewer iPhones in the second quarter than it did during the same period last year.


The Federal Reserve is expected to leave interest rates unchanged after its meetings this week, giving analysts and observers an opportunity to keep guessing when the next hike will come. Within the hedge fund industry, managers are predicting that it won’t be until after the presidential election. According to a recent survey conducted by the New York Hedge Fund Roundtable, members of the hedge fund industry believe the Fed is holding off on raising interest rates not because of a stubborn unemployment rate, but because it doesn’t want to interfere with the outcome of the impending election. When asked when the rate hike will finally come, 73 percent of those polled said it would be after November 8. Of the survey’s respondents, 24 percent were fund managers, 16 percent were allocators, 16 percent were risk managers or traders, 42 were percent service providers and 2 percent were other industry participants.


Equity hedge fund managers are reducing long positions and covering short bets as they continue to struggle in the search for alpha, according to a report from Credit Suisse. Long/short strategies are outperforming the market when it comes to sector selection and individual stock selections, but gross exposure is still lagging the 4.8 percent rise in global equities so far this month. That gross exposure is still close to the three and a half year low, and year to date net exposure is only 22.2 percent, which Credit Suisse says reflects low conviction in equities. When it comes to sectors, 40 percent of equity funds’ net exposure is to software and services, while they have reduced their exposure to pharma and internet retail. Meanwhile energy and industrial stocks have outperformed for both long and short positions this month, according to the report.


Man Group’s assets under management contracted from $78.6 billion in March to $76.4 billion at the end of June. The firm’s flagship AHL Diversified fund fell 6 percent in the three-month period ending June 16, with other AHL funds posting smaller declines over the same period. In a report detailing interim results for the first six months of the year Man Group CEO Emmanuel (Manny) Roman said that the first half of the year had been challenging, particularly for the firm’s long-only strategies. But AHL’s momentum strategies struggled too, performing well during the volatile first quarter and then returning gains when the markets reversed in the second quarter. “Recent volatility post-Brexit has benefited AHL but created a difficult environment again for our discretionary strategies,” he said. Man Group announced last week that Roman will be leaving the top job at Man Group in London to join Pimco as CEO in Newport Beach, California.

Man Group reported $500 million in inflows during the second quarter, but $1.5 billion in total investment losses. The firm isn’t alone. According to EurekaHedge, European asset managers just came out of the worst six-month period they’ve seen in 16 years, losing an average of 3 percent.