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The Morning Brief: Why Stock-Oriented Hedge Funds are Buy-and-Hold Investors

Stock-oriented hedge funds continue to belie their now very old image as rapid, aggressive traders. According to Goldman Sachs’ analysis of December quarterly disclosures of U.S. long stock positions, turnover in hedge fund portfolios rose, but to just 29 percent. This is up from a record low of 26 percent at the end of the third quarter. But even these very low levels are sort of inflated. According to the report, turnover of the largest quarter of hedge fund positions — which represent two-thirds of all hedge fund long holdings — fell to a mere 14 percent. Meanwhile, the average hedge fund has 67 percent of its long assets invested in its 10 largest positions, according to the report.

To put this in perspective, this figure compares with 31 percent for the average large-cap mutual fund, 19 percent for the average small-cap mutual fund, 18 percent for the S&P 500 and 3 percent for the Russell 2000 Index. This data underscores why it could be useful tracking the top holdings of hedge funds after they make their quarterly filings even though they are typically made about 45 days after the end of the quarter.

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Shares of hedge fund favorite Depomed fell 2.4 percent, to close at $16.83, after UBS slashed its price target on the stock from $24 to $17. In a note to clients, the investment bank expressed disappointment that the pharmaceutical company, which specializes in neurology-related products, said its 2017 sales guidance “came in well below” its estimate. As a result, UBS said it is “difficult to get more positive” on its lowered estimate numbers.

Jeffrey Smith’s Starboard Value is the second-largest shareholder with 8.56 percent of the shares. Back in September, the New York activist fired off a letter to shareholders asserting Depomed would be “extremely attractive” to numerous potential acquirers. Starboard initially disclosed an activist position in the stock back in April 2016, stating in its filing at the time that it had “significant concerns” about Depomed’s corporate governance deficiencies, questionable capital allocation decisions and “egregious actions taken” to avoid being acquired. Starboard accused management and the board of deliberately entrenching themselves and threatened to submit its own slate of director nominees at Depomed’s next annual meeting.

In early January, there were published reports that private equity giant KKR may make a bid for Depomed. In its note on Thursday, UBS acknowledges reports of a possible takeover offer but points out that in recent weeks the stock pulled back due to the lack of a deal. “We believe that the strength in the stock today is due to management’s comments on the debt paydown/refinancing and its commentary on commitment to building scale either through a sale of the company or an acquisition,” the note states.

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Viking Global Equities, which is managed by O. Andreas Halvorsen’s firm Viking Global Investors, posted a 2 percent gain in January. The Tiger Cub’s long-short fund lost 4 percent last year. Meanwhile Viking established a stake of 1.142 million shares in Calithera Biosciences, Inc., or 7.8 percent of the clinical-stage pharmaceutical company focusing on developing small molecule drugs directed against tumors. The investment is passive.

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Fresh off its first gain in three years, the Brevan Howard fund, managed by London-based Brevan Howard, fell 1.46 percent in January.

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Shares of Bristol-Myers Squibb rose 1 percent, to close at $55.33, on reports that Carl Icahn bought a stake in the drug giant and believes the company is a good takeover target. The reports follows the company’s Tuesday announcement that it will add three new directors and repurchase $2 billion worth of stock as part of a settlement with activist hedge fund JANA Partners. Bristol-Myers Squibb said in a press release that since JANA became a shareholder in the fourth quarter of 2016, members of the board and management have held discussions with the investor “to better understand their views.” Tuesday’s appointments follow those discussions.

“These three new independent directors will add valuable industry knowledge and fresh perspectives to the board, and shareholders stand to reap a substantial benefit from the company’s sizable investment in its undervalued shares,” Barry Rosenstein, founder and managing partner of JANA, says in the press release announcing these moves.

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Joseph Edelman’s Perceptive Advisors nearly doubled its stake in Zogenic to 1.355 million shares, or 5.46 percent of the total. Zogenic develops therapies for central nervous system disorders. Perceptive specializes in smaller capitalization stocks in a large variety of health care companies.

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