Hedge Funds Lost A Bundle On IT, Cons. Discretionary, Biotech Longs

The March 2014 Hedge Fund Monthly Update from UBS financing services highlights important trends that impacted hedge funds returns by strategy in that month.

Hedge funds: US growth stocks in sell mode

“There was a notable sell-off in US growth stocks the last week of the month, particularly in Information Technology, Consumer Discretionary and Biotech names,” observes the research note. Hedge funds holding long positions in these sectors lost heavily during March, though on an overall basis, short positioning in the sectors balanced off some of the losses in the long-short strategy.

According to UBS’ analysis, in the IT sector, the 10 most crowded shorted stocks lost 3.4% while the 10 most crowded longs lost 2.4%, indicating the shorts made the money.

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In Biotech the 10 most crowded shorted stocks lost 13.9% while the 10 most crowded longs lost 8.1% – indicating a similar favorable result in favor of the bears.

The story was different in Consumer Discretionary, however, where crowded shorts lost 1.5% but the crowded long stocks lost 5%.

Hedge funds: Long DM / short EM backfired

“Global equity markets were positive in March, but emerging markets outperformed developed markets by quite a margin (MSCI EM +2.9% vs. MSCI World +0.1%),” says the report. “In general, the popular long DM, short EM trade did not work, and hedge funds that were short Brazil had a particularly tough time in March as the Bovespa rallied +7% and the Brazilian currency rallied +3% (USDBRL),” it adds.

Hedge funds long on emerging markets gained 0.5% during March but (-0.4%) year to date 2014.

In the emerging markets, the rally in Brazil was particularly notable – the MSCI Brazil index shot up 17% during March, and ironically, gained 9% after S&P’s downgrade on March 24. Concurrently, the Bovespa was up 7%, making it a tough month indeed for hedge funds that were holding shorts on Brazil.

UBS are Underweight on Brazil citing the improbability of structural reforms being implemented in the country, unwarranted strength in the real and negative earnings momentum.

UBS also point out that Global Emerging Markets funds finally ended their unbroken streak of fund outflows over 22 weeks (which totaled $51.2 billion), and in the last week of March and first week of April these funds were able to garner $5.4 billion worth of inflows.

2-em-flows Hedge Funds

Copper shorts in the money

Short trades by hedge funds in copper prove profitable in March after the metal declined 6% on market fears of an economic slowdown in China and rising financing costs of holding inventory.

The sustained downtrend in the price of the metal has also attracted technical selling by CTAs, according to UBS.

1-copper Hedge Funds

In addition, because the restocking cycle is over, growth in demand is likely to be flat unless industrial production grows in excess of what it did last year.

“Since March, the continued depreciation in RMB and decline in domestic funding costs, as well as the widening negative gap between imported and domestic copper, have increased the cost of copper-backed financing, which is very likely to cause a gradual outflow of copper inventories used for financing,” anticipate UBS, expressing a bearish view on copper.