Morning Brief: Consolidation Slows in the Shrinking Funds-of-Funds Industry

Consolidation in the funds-of-hedge-funds industry has slowed after several years of mergers and acquisitions and shrinking assets. From 2000 through 2008 — the period leading up to the financial crisis — there were 15 mergers or acquisitions, according to Preqin. Since 2009 there have been 56 deals. Thirty-five of the deals took place from 2009 through 2013, or seven per year, on average, and 11 in 2014 alone. Since 2015 there have been a total of just 10 deals.

The upshot of all of this activity? At the end of June there was $798 billion invested in these funds, down one-third from $1.2 trillion in June 2008, as more investors in hedge funds have moved toward picking individual hedge funds themselves, according to Preqin. Meanwhile, the number of new funds has also been declining in recent years. For example, there were 207 new funds of funds launched in 2007. This compares with just 10 in the first half of 2017, according to the report. Since 2012, 475 funds of hedge funds have launched globally while 861 liquidated.

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Shares of Charter Communications, a popular holding among hedge funds, dropped around 8 percent on Thursday after the cable and broadband giant reported disappointing quarterly results, including a net loss of 104,000 video subscribers, more than double the number of losses reported a year ago. If the stock extends its losses in future sessions, this could have a big impact on hedge fund performance. At the end of the second quarter, at least 110 hedge funds held a position in Charter, including 49 that held the stock among their top-10 positions.

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At least two investment banks Wednesday raised their price targets on Caterpillar, the heavy equipment maker that David Einhorn’s Greenlight Capital has been shorting for about a year. UBS Group raised its earnings estimates for each of the next three years and lifted its price target to $155 from $140 after the company reported third-quarter results that were better than expected. “We expect the cycle to continue,” UBS said in its note. Credit Suisse Group has raised its price target for Caterpillar to $155 from $146, noting it remains a “top pick.” The banks said in a note that “investors underappreciate CAT could become more of a return, cash flow story in 2018 and as such more than just a cycle play.” In its third-quarter letter, Greenlight said the firm is skeptical that Caterpillar is still well below mid-cycle earnings. The stock declined slightly on Wednesday, after the reports were released on an overall down day for the stock market. Shares of Caterpillar slipped less than 1 percent on Wednesday, and rose less than 1 percent on Thursday. The stock has also surged nearly 50 percent for the year. Greenlight declined to comment.

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Perceptive Advisors said in a regulatory filing that as of October 24 it owned more than 8.3 million shares of Quotient Limited, or 17.4 percent of the commercial-stage diagnostics company. Earlier this week the company raised $40 million in a private offering of stock and warrants. At the end of the second quarter, the healthcare-oriented hedge fund firm held 3.7 million shares of Quotient. We won’t know for nearly three weeks how many shares it held as of the end of September.