Analysis: The Biggest Hedge Fund Paydays Of 2016, From Charter Communications To Natural Gas
Hedge fund investors have a lot to celebrate as 2016 draws to a close and they sharpen their pencils on new investment ideas and macroeconomic themes for the coming year.
Managers broadly continue to struggle to beat the S&P 500 Index and the industry suffered its worst outflows since the financial crisis in the third quarter. But the election of Donald Trump and a sharp and sudden upward move in U.S. interest rates, stock indices and commodity prices means many managers enter 2017 with more dispersion in markets and a broader canvas for money making trades. Even in a challenging year, many of Wall Street's brightest minds found opportunity in the ups and downs of 2016.
Some highly followed investors waded heavily into in commodity stocks during a beginning of year downturn, others agitated for a surge in M&A activity in the technology sector. Many managers bet smartly on consolidating sectors like communications, others loaded up on dirt cheap financial stocks that have surged in the Trump rally. Here are the top hedge fund paydays of 2016:
Viking Global Goes All-In On Natural Gas
Billionaire Andreas Halvorsen made a lot of headlines in early 2016 when his hedge fund Viking Global built a $6 billion position in so-called 'FANG' stocks Facebook FB -1.37%, Amazon, Netflix NFLX -0.71% and Google GOOGL -0.29% (Alphabet ), a move that's so-far beat the market. But Viking's best trade of the year came in early January, when the fund used a beginning-of-year plunge in commodity prices to bet $1 billion on natural gas producers like Range Resources RRC +0.03%, Southwestern Energy SWN +0.91%, Encana , Cabot Oil & Gas COG -0.62% and Gulfport Energy. When gas prices quickly recovered and the sector turned to a top performer on the S&P 500, Viking nearly doubled its money.
The $30 billion hedge fund entered 2016 with just $400 million invested in the five companies listed above, all among the largest natural gas drillers in North America. But when natural gas plunged below $2/mmBTU in early January, Viking Global stepped into the sector in a major way. Between early mid-January and the beginning of February, Viking plowed roughly $1 billion into these stocks, building a 7.5% position in Cabot, a 9.2% position in Southwestern Energy and a 6.5% position in Encana. Viking's holding in Range Resources hit 6.8%, while its Gulfport stake hit 7.3%, filings show.
Gas prices recovered almost immediately after Viking staked its bet, and the $1.4 billion aggregate position it built is now worth approximately $2.4 billion. Viking added to its natural gas trade through the course of 2016 and now holds over $3 billion in stock among these five companies. Other hedge funds including billionaire Michael Hintze's CQS also smartly piled into the oil and gas space in early 2016, generating outsized returns.
Chemours: Short-Seller vs Short-Seller
Was DuPont performance chemicals spin-off Chemours intentionally designed for bankruptcy, or a cyclical corporate carve out ready to surge in 2016?
When short-seller Citron Research sent Chemours into a tailspin in early June after publishing a report titled 'Chemours is a bankruptcy waiting to happen' due to its potential legal liabilities from a class action lawsuit surrounding perflourooctoic acid, it was billionaire David Einhorn, of hedge fund Greenlight Capital, who saw an opportunity to take the other side.
Greenlight Capital had been a small Chemours holder heading into 2016, meaning Einhorn knew just how volatile the stock could be. It fell 40% between December and mid-January. But he was undeterred, more than doubling Greenlight's position during the first quarter of 2016. When Citron struck with its June 2 report Einhorn just kept buying, building an over 16 million share position by the end of the second quarter at an average price of $6.58, or a total cost of just over $100 million.
Chemours has surged 360% year-to-date to nearly $25 a share, buoyed an investor stampede into volatile or even distressed cyclical stocks. Chemours CEO Mark Vergnano's ahead of schedule execution on cost cuts and operational improvements laid out during its spinoff have also given investors a fundamental reason to be bullish.
Nonetheless, the company remains subject to the headline risks that turned it into a Wall Street battleground. Chemours sank as much as 11% on Wednesday when an Ohio judge awarded $2 million to a man who developed testicular cancer from exposure to PFOA during a leak. There are presently over 3,400 lawsuits against surrounding the PFOA leak.
So far it is Einhorn, a short seller in his own right, who is in the green in a big way on Chemours. Greenlight's $100 million bet on Chemours is now worth nearly $400 million, helping to drive a rebound year for Einhorn after a 20% loss in 2015.
Charter: A Hedge Fund Hotel, Without The Nightmares
When hedge funds rushed into tax dodging and hyper acquisitive drug stocks like Valeant Pharmaceuticals VRX +0.49%, Mallinckrodt and Endo ENDP +0.51%, only to then lose a collective tens of billions of dollars, some of Wall Street's brightest minds learned a valuable lesson on the pitfalls of crowdsourcing their investment picks. But that's not to say so-called 'hedge fund hotel' stocks always blow up in flames like wax-winged specialty drugmakers.
Few companies are as loved among Wall Street's elite as Charter Communications CHTR -0.12%, a highly leveraged consolidator of the cable sector that recently closed a mega-takeover of Time Warner Cable TWC +%. Over half of Charter's top 40 shareholders entering 2016 were hedge funds, but the crowding has paid off. Charter is up nearly 50% in 2016, minting money for hedge funds like TCI Fund Management (it rolled its TWC shares), Lone Pine Capital, SPO Partners, Blue Ridge Capital, Egerton Capital, Soroban Capital, Tiger Global and Brahman Capital. For some Charter-loving hedge funds, their gains in 2016 were a relief from heavy Valeant losses.
Charter stands to benefit from a de-regulatory bias in Washington that may relieve scrutiny on industry consolidation, or allow firms to hold greater pricing power. Charter's management team, led by CEO Tom Rutledge, is also seen as among the savviest in the communications industry, halving already delivered improving performance at legacy Time Warner Cable operations.
A Bet On Boring Morgan Stanley Gets Exciting
The bumper post-Election rally in bank stocks has lifted many boats on Wall Street. Goldman Sachs and JPMorgan shares now trade at all-time records, while Bank of America BAC -0.40% and Morgan Stanley MS -1.34% continue to test new post-crisis highs. Trump's surprise victory ushered in a stunning shift in sentiment, as banks went from a multi-year stock market malaise to a red hot sector on the S&P 500.
Jeffrey Ubben's ValueAct Capital, one of the deans of activist investing, had the biggest coup in 2016 from the Trump bank stock rally. It staked a $1.1 bet on Morgan Stanley during the spring and summer when the investment bank's stock was trading in the mid-20s, perhaps a bargain price given the firm's successful bet on wealth management and its improved financial health.
Into Election Day, Morgan Stanley shares were already marching higher as the firm posted strong earnings and stock investors gave CEO James Gorman high marks on his tenure. After Election Day, Morgan Stanley has surged nearly 30%, putting year-to-date gains at around 40%.
Gains on ValueAct's big bank bet are approaching 70% in under a year's time, generating a paper profit of at least $650 million. Though the hedge fund mostly makes headlines for its activism, ValueAct is also often able to spot companies emerging from a transformation, for instance Microsoft MSFT -0.02% and Adobe. Add Morgan Stanley to ValueAct's mantle of investment wins that have more to do with value investing than activism.
Nvidia And A Quant Fund Making Smart Trades
Like most quantitative hedge funds, Boston-based Arrowstreet Capital stays out of the limelight and runs an endlessly broad portfolio of stocks, making it hard to parse a particular view. But it's hard to hide from building a major position in the S&P 500's hottest stock, Nvidia. To boot, it seems Arrowstreet also correctly made large investments in the best performing sectors in 2016 such as semiconductors, materials and miners.
In addition to a Nvidia holding that now stands at nearly $800 million, Arrowstreet built large stakes in 2016 top performers like semiconductor AMD, and old economy stocks like AK Steel, Teck Resources , Cliffs Natural Resources CLF -2.72% and Petrobras . As a quant, Arrowstreet is known for having reflexive models that quickly adapt to changing market conditions. In the case of materials and miners, it seems Arrowstreet was able to spot a bottom given its bulked up exposure to the sector between January and June. With semiconducors, its holdings have benefited from consolidation and a new growth runway for firms like Nvidia that sit at the heart of the artificial intelligence boom.
Arrowstreet manages some $68 billion for 150 clients globally. Documents detailing the performance of the Arrowstreet Global Equity fund show it has generated 19.4% net returns annually over the past five years.
Jesse Cohn And Elliott Management's Dominion Over IT & Software Stocks
Recently, many hedge funds have struggled to generate new ideas and found themselves on the wrong end of crowded trades. For hedge fund Elliott Management and the firms's head of U.S. activism Jesse Cohn, it's paid off to tread where Wall Street isn't looking.
In recent years, Cohn's transformed into one of the most effective hedge fund activists by targeting the IT and software space, where mid-cap companies are often growing their top lines at 30%-to-40%, but suffer from exceedingly flighty investors at any growth blip. In comes Cohn, who either finds value as investors stampede out of the sector or turns activist, urging a company to go private or merge with a competitor holding greater scale.
In 2016, Cohn chalked up numerous investment wins. Targets Qlik Technologies QLIK +% and Mentor Graphics were taken private, EMC EMC +% closed its merger with Dell and Elliott Management reached a settlement with Citrix. New billion dollar activist bet Cognizant Technology Solutions CTSH +% has gained over 5% since Cohn outlined an activist stake.
But no stock is better evidence of Cohn's money minting mousetrap than LifeLock. Between June and August, Elliott Management built a 8.4% stake in the identity theft protection provider and urged it to consider a sale. When LifeLock hired Goldman Sachs to run an auction, it was Elliott's recently established private equity arm (led by Isaac Kim) that was among the most likely buyers. In the end another Elliott investment, Symantec SYMC -0.58%, won the LifeLock auction due to a smart strategic fit between the two IT security firms.
The deal made Elliott Management a 75% gain in a matter of months and it's also been seen as smart acquisition for Symantec, where the hedge fund's stake stands at around $300 million, according to filings. Heads Cohn wins, tails Cohn wins.
Others have succeeded in the IT space in 2016. Starboard Value's Jeffrey Smith generated a quick 75% profit after building a 7.1% stake in Infoblox at around $15 a share in March and April. Starboard saw a big gain when the company agreed to be sold to Vista Equity Partners for $26.50 a share in late September.
Make Fannie And Freddie... And Ackman, Paulson And Berkowitz... Great Again
Sure bank stocks have rallied as much as 40% since Donald Trump was elected president. But the biggest post-Election gains in the financial sector come government sponsored housing agencies Fannie Mae and Freddie Mac , whose common and preferred shares have more than doubled since Nov. 8.
For years, hedge fund billionaires like William Ackman and John Paulson have bet on Fannie and Freddie, expecting eventually both GSEs would exit government conservatorship and become private entities able to retain their billions in quarterly profits. Star mutual fund manager Bruce Berkowitz of Fairholme Funds has also bet big on this trade, which is beginning to pay off. Trump's pick for Treasury Secretary, Steven Mnuchin, has said getting Fannie and Freddie out of conservatorship is among his ten biggest priorities, spurring a sustained rally.
In the annals of lottery ticket financial sector bets, extra credit goes to Paulson & Co.'s John Paulson.
In addition to a binary Fannie trade, Paulson's hedge fund is the biggest holder of warrants Bank of America issued as part of its government bailout. As BofA's shares have climbed higher, the asymmetric characteristics of these assets are paying off. Paulson's holding of BofA warrants -- BAC/WS/A US on the Bloomberg terminal -- is up over 75% year-to-date. Unfortunately for Paulson, the gains are little respite from a backfired pharma bet that's caused his merger strategies to trade off as much as 20% this year.
A Bet Against Global Warming Heats Up
Last Christmas was a washout for most ski resorts in the Northeast, and it wasn't so great in many parts of the Rockies either. That lack of snow, due to an El Nino weather pattern and global warming, battered ski stocks like Intrawest Resorts and Peak Resorts. Private equity and hedge fund firm Fortress Investment Group took Intrawest private about a decade ago and nearly bankrupted the company within a few years, forcing it to sell off a holding in North American skiing crown jewel, Whistler.
Even with this distress, Intrawest held onto resorts like Steamboat, Winter Park and Mont Tremblant in Quebec, all among the top ski areas east of the Alps. The company also retained its interest in Canadian Mountain Holidays, a heli-skiing operation that appeals to Wall Street weekend warriors and extreme skiers alike.
But during the 2016 snow drought, investors gave up on the value in Intrawest's mountains and fled the stock.
From June 2015 through early January, Intrawest slumped from $12 a share to as low as $6.95, or a market value around $300 million. In came Fortress with a tender offer on January 12 to buy $50 million Intrawest shares for between $9 and $10 a share. The tender was successful and as a better outlook for skiing has emerged, Intrawest shares have ripped higher to nearly $20 a share. Fortress has roughly doubled its money on the $50 million Intrawest tender.