Hedge funds' favorite stocks lag broader market -Goldman data

Mon Nov 23, 2015 4:26pm EST
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By Svea Herbst-Bayliss

BOSTON Nov 23 (Reuters) - Hedge fund managers' favorite stocks stumbled hard this year to post their worst returns since the financial crisis with health-care companies, such as Valeant Pharmaceuticals, leading the way lower, according to new data from Goldman Sachs.

Goldman analysts calculated that the basket of managers' 50 most heavily owned stocks - among which are Allergan, Facebook, Netflix and Cheniere Energy - lost 2.4 percent since January, while the Standard & Poor's 500 stock index gained 3 percent during the same time.

Since August, when Goldman rebalanced what it calls its Hedge Fund VIP list, the industry's favorite stocks have lost 5 percent, compared with the S&P 500's 1 percent gain, Goldman said in a report released on Monday.

"Health-care stocks within the basket, most notably VRX, were responsible for nearly 70 percent of the basket's negative return," the report said, referring to Valeant.

Valeant's stock price tumbled some 70 percent in the 3-1/2 months from July through mid-October amid questions about its drug pricing strategy and accounting practices. The heavy losses have weighed on hedge funds including William Ackman's Pershing Square and Nehal Chopra's Tiger Ratan, investors have said.

Hedge funds' stock picks and what managers earn off their bets have been scrutinized for years, but they are receiving extra attention now that pension funds and other institutional investors are putting more money into hedge funds.

Energy company Cheniere, which is among the top-10 holdings of 14 hedge funds and is 64 percent-owned by hedge funds, also dragged on returns, having dropped 29 percent this year.

Traditionally, the Hedge Fund VIP list has outperformed the S&P 500, the Goldman data show, noting that the list beat the S&P 500 by 2.65 percentage points last year. In 2013 it beat the S&P 500 by 9 percentage points after beating it by 7 percentage points in 2012.

When stocks tumbled in August amid concerns of slower growth in China and nervousness about when the Federal Reserve will raise interest rates, many fund managers adjusted their holdings, cutting health-care exposure and adding to technology holdings.

"Hedge funds moved away from laggards to stronger performers," Goldman analysts wrote, noting that the VIP list now includes Chinese web services company Baidu Inc and online payments system company PayPal Holdings and no longer includes food company Kraft Heinz Co and Valeant. (Reporting by Svea Herbst-Bayliss; Editing by Leslie Adler)