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The Morning Brief: Rhode Island to Fully Redeem from Seven Hedge Funds

Rhode Island’s State Investment Commission has agreed to fully unload its investments in seven hedge funds. The decision follows the announcement last month by the state’s general treasurer Seth Magaziner to reduce its commitment to hedge funds under its “Back to Basics” investment strategy. Altogether the pension fund will redeem a total of $585 million from the hedge fund firms, including Ascend Capital, Brevan Howard, Brigade Capital Management, Emerging Sovereign Group (formerly Carlyle Group), Partner Fund Management, Samlyn Capital, and Och-Ziff Capital Management. The two largest positions were in Samlyn, $106 million, and Och-Ziff, $103.3 million. Rhode Island also halved its exposure to Viking Global Investors.

According to minutes from the pension fund’s October meeting, Magaziner stated that Rhode Island’s staff is still making determinations as to which hedge funds will be kept, but in the future the litmus test for retaining a hedge fund will be that it provides returns and that it offers true protection against market volatility. Through September, the pension fund has suffered a loss in five of these firms’ seven funds in which it is invested. One of them — Brigade Leveraged Capital Structures Fund — is up nearly 20 percent for the year. However, it lost more than 10 percent last year.


More bad news for hedge funds. Investors yanked out about $10.3 billion in September, bringing total third-quarter redemptions to $29.2 billion, according to eVestment. This is the highest level since the first quarter of 2009, when the global markets were bottoming amid the sharp bear market. September was also the fourth straight month of net redemptions. Altogether, hedge funds have suffered $59.9 billion in redemptions for the year to date. Commodity funds saw outflows for the first time in 12 months. However, they still have experienced $11.24 billion in net inflows for the year, the only major category tracked by eVestment to be positive for the year. One broad silver lining: The total outflows over the past 12 months came to $86.7 billion, which is still less than half the amount in only the first quarter of 2009.


Bill Ackman’s Pershing Square Capital Management has once again suffered from bad timing. Shares of Chipotle Mexican Grill fell more than 9 percent on Wednesday to close at $368.02, after the casual dining chain reported quarterly earnings that sharply missed analysts’ expectations. On Wednesday, Deutsche Bank cut its price target on the stock from $340 to $280, asserting, “While management is taking significant and positive steps to transition into a better positioned company (led by technology and data insights), we do not believe the progress will be easy or consistent.” Credit Suisse reduced its rating on the stock from outperform to neutral and cut its target price from $500 to $375, noting Chipotle’s sales recovery “continues to take longer than expected.” Less than one week ago, Pershing disclosed it bought more than 2.3 million shares of Chipotle for around $407 per share and owns 9.9 percent of the shares.


Shares of hedge fund favorite Apple fell 2.25 percent, to close at $115.59, after the maker of the iPhone served up disappointing guidance. The stock had been surging until now, rising 28 percent since late June. In response to the earnings news, Deutsche Bank maintained its hold rating, adding, “Given the stock’s recent move higher, we see current valuations as fully reflecting positive expectations.” Credit Suisse maintained its outperform rating, recommending investors buy any dips. At the end of the second quarter, Apple was the fourth-most-popular hedge fund stock, with at least 139 hedge fund holders, according to Goldman Sachs.

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