The Morning Brief: Goldman Report Rocks the Popular Hedge Fund Stocks

Shares of most of the most popular hedge fund stocks plunged by several percentage points on Friday after a major investment bank warned of the risks in owning these stocks. Facebook, the most widely held hedge fund stock, Alphabet (Google’s parent), Amazon.com, and Apple all dropped between 3 percent and 4 percent, while Microsoft fell between 2 percent and 3 percent. Their stocks were much lower earlier in the day but started to reverse a little more than an hour before the markets closed.

Many of these stocks are driving the huge gains being posted this year by many of the long-short managers with ties to Julian Robertson Jr., including not just the most renowned Tiger Cubs but many of the small Tiger Seeds and Grandcubs as well. The selloff came on the same day Goldman Sachs published a report entitled “Is FANG mispriced?,” a reference to the acronym for most of these popular hedge fund trades. Goldman prefers to call the group FAAMG — for Facebook, Amazon, Apple, Microsoft and Alphabet — noting their outperformance “has created positioning extremes, factor crowding and difficult-to-decipher risk narratives.” The report stresses that while these stocks may continue to climb “mean reversion risk is increasing.” It warns: “FAAMG stocks are cyclical growth stocks that have increasingly been treated like stable Staples with a similarly negative correlation to interest rates and even lower realized volatility.” It cautions that their minimal volatility characteristics “could draw incremental flow into the stocks but can just as easily reverse.” If this is the start of a reversal in these stocks, at least one investor who will be celebrating is David Einhorn, who has been hurt so far this year from shorting what he calls his “bubble basket” of high-flying over-priced stocks.

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Finally some good news for Crispin Odey’s Odey European, the hedge fund managed by his London-based firm Odey Asset Management. The embattled fund gained 5.7 percent in May, cutting its loss for the year to 4.4 percent. The fund had fallen 61.57 percent from January 2015 through April 2017. Its last profitable year came in 2014, when it was up 5.5 percent.

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Klaus Jantti, the chief executive officer of Brummer & Partners, has left the firm amid a wider management shakeup, according to Financial News. Chief operating officer Ola Paulsson will take over as CEO. According to the report, a new co-manager has been brought in to run Nektar, the firm’s flagship $4.5 billion multistrategy fund. Altogether, the Swedish firm managed $14 billion at year-end, according to Alpha’s annual Hedge Fund 100 ranking of the world’s largest hedge fund firms. So far this year, Brummer Multistrategy 2XL is up 7 percent through May, according to an HSBC hedge fund performance report. According to the Financial News report, Nektar is up 3.4 percent.

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Paul Singer’s Elliott Advisors boosted its stake in Dutch paint maker Akzo Nobel to at least 5 percent, according to Reuters, citing a Dutch regulatory filing. Last week, PPG Industries cancelled its bid to acquire Akzo.