A few hedge funds ride shorts to big profits

By Lawrence Delevingne

NEW YORK (Reuters) - A small group of hedge fund managers have beat their struggling peers and the anemic stock market by betting against stocks.

John Burbank’s Passport Capital, Lee Ainslie’s Maverick Capital, Paul Hudson’s Glade Brook Capital Partners and Adam Bernstein’s Pagoda Asset Management have made bets that individual stocks would fall, known as short trades, that have driven their funds' performance in recent months.

The average stock-picking hedge fund, as represented by the Absolute Return U.S. Equity Index, gained just 0.04 percent from the beginning of January through October. That’s less than the Standard & Poor's 500 index's gain of 2.7 percent, including dividends, over the same period following sharp sell-offs in August and September. Virtually all stock hedge funds bet that some stocks will rise and others will fall, but most are net owners of stock, meaning they do best when shares rise.

The main fund managed by $4.4 billion Passport is up 12.8 percent through October thanks to a slew of profitable short bets, according to performance information and an Oct. 30 letter to investors seen by Reuters. Specific bets were not named, but Passport’s third-quarter gain of 6.7 percent by its Global fund was driven by shorts on stocks in the basic materials sector, the letter said. The fund also made money betting against energy stocks and shorting crude oil directly. A spokesman for Passport declined to comment.

Shorts have also boosted $10 billion Maverick, whose main hedge fund is up about 16 percent this year through October, according to investor materials seen by Reuters.

“Our short investments were profitable in every industry sector and each region in which we invest,” Ainslie wrote in a letter to investors summarizing the third quarter, when the fund gained 2.7 percent.

More information on the shorts was not disclosed, but Maverick had its largest long bets on technology, media, and consumer stocks at the end of the third quarter, according to a recent public filing, including Liberty Global, Aramark and Google. The letter also noted that the fund took a relatively conservative posture toward market risk earlier in the year, a move that paid off in recent months.

Glade Brook, which invests in technology, media, telecommunications and consumer sector stocks, also gained from short bets.

The firm’s hedge fund’s 2.7 percent return over the third quarter was driven by betting against unnamed traditional retailers, especially those hurt by growing competition online, and old-line media companies hurt by the types of companies it is long, such as Facebook and Google parent Alphabet Inc, according to an investor letter seen by Reuters.

The hedge fund is up about 12 percent net this year, according to a person familiar with the situation, with longs and shorts contributing roughly the same amount to performance. The largest single winner is a long bet on online travel agency Expedia Inc, according to the person. Glade Brook manages slightly more than $1 billion, according to the letter, with $314 million in its hedge fund strategy (The majority is in private equity funds that bet on fast-growing technology companies such as Uber and Snapchat).

A final example is Pagoda. The $211 million firm, launched in September 2014 by veterans of Highbridge Capital Management, saw its main fund gain 14.5 percent trough October, according to a person familiar with the situation. The fund gained 5.1 percent in the third quarter thanks to shorts on undisclosed companies in leisure and retail sectors, among others, according to a letter sent to clients seen by Reuters.

One well-known manager who has added to his shorts is Dan Loeb of Third Point.

“The environment for short selling is also attractive,” he wrote in a recent investor letter, “and we have more single short names than long positions in our book today.”

A spokesman for Third Point declined to comment. Its main fund has returned virtually zero for the year after gaining 4.7 percent in October, according to a performance update seen by Reuters.

(Reporting by Lawrence Delevingne; Editing by Jonathan Oatis)

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