Waterstone Market Neutral Fund is ranking among the worst performing hedge funds of the year, according to returns taken from HSBC Hedge Weekly. The fund, which uses a convertible arbitrage strategy was down 9.37 percent for the year to May 17. The contrarian short positions of Waterstone seem to have brought losses for the fund so far—the largest detraction was suffered in April when returns were down almost 4 percent. Waterstone, with $1.5 billion in AUM, is net short in credit and equities, this being the chief reason of its underperformance when markets have swung upwards.
Dialectic Capital, another short biased hedge fund has had no particular luck as well. Returns were down 4.9 percent in the three months ending in March. Dialectic points out that markets have continued to outperform irrespective of adverse macroeconomic signals. The fund notes that the most heavily shorted stocks have risen by volumes, a theme that is also pointed out in Waterstone’s commentary. Even after missing earnings expectations, stocks have managed to rocket in the following weeks, a phenomenon that beats reason.
Waterstone Losses in Short Portfolio
Waterstone, managed by Shawn Bergerson, lost in its short bets in SUPERVALU INC. (NYSE:SVU). The grocery retailer has lately become a long bet of many funds after short interest in SVU’s shares declined from 40 percent to 26 percent in Q1. Notable hedge funds with new long bets in SUPERVALU INC. (NYSE:SVU) are Jana Partners, Leon Cooperman’s Omega Advisors, SAC Capital and Glenhill Advsiors. After absorbing a +170 percent increase in share price, it is no wonder that the holding has been one of Waterstone’s biggest losers.
Waterstone does not believe in the growth projections that are being touted by Supervalu’s new CEO, and the fund is of the opinion that the management has no creative plan at hand to achieve its professed goals. The hedge fund has another short in New Albertson’s, which has a network of grocery and drug stores. New Albertson’s previous form, Albertson’s, was once a partially owned subsidiary of SUPERVALU INC. (NYSE:SVU). The fund is very bearish on New Albertson’s recovery prospects.
Other unusual short bets of Waterstone include Federal National Mortgage Association (OTCBB:FNMA) and Federal Home Loan Mortgage Corp (OTCBB:FMCC). Again both of these have been the target of zealous long bets from hedge funds. John Paulson and Richard Perry have bet on the recovery of these mortgage giants. While hedge funds are meaning to cash in profits from preferred shares of both companies, Paulson and Perry are also campaigning for the privatization of Fannie and Freddie.
Interestingly, some selling in both FNMA and FMCC drove down share price as much as -40 percent today. Within hours, nearly half of the market value was wiped off in the subsequent trading. However, the stock is now down around 12 percent and has been rising the past few hours.