Equity hedge fund managers could be rubbing their hands after news that large-cap technology companies are sharpening their knives "trimming the corporate fat" this year, after posting losses from their exposure last year.
Equity hedge funds overall underperformed in 2022, with the latest data from Hedge Fund Research showing its equity index declined 12.8% last year. The index is up 1.3% so far this year through to Jan. 16.
With soaring interest rates and the S&P 500 index slumping 19% in 2022-- its worst year since 2008 -- fund managers investing in stocks have admitted how tricky last year was for them.
"Equity long/short had some difficult headlines last year," said Claire Tucker, senior investment officer at UBS Asset Management, at a media event on Wednesday. "Despite those headlines, if we look under the hood, 2022 was actually a good year for alpha, but most of that alpha was on the short side of portfolios."
The mass sell-off of stocks of high growth companies last year led to hedge funds moderating their long/short exposure, according to a Morgan Stanley 2022 hedge fund recap report, led by Bill Meany.
This year, equity portfolio managers have told their investors that they are now hopeful that this will cause tech companies to become more financially efficient.
And true to their hopes, they have begun tightening the purse strings. Google's parent company Alphabet joined a long line of major companies making large layoffs on Friday.
"The spread between long and short appreciation was mixed by sector this year," the Morgan Stanley report said at the end of December. "When looking at [hedge funds] long holdings, almost all sectors underperformed their respective benchmark [...]-- Health Care, TMT, and Consumer-related sectors were among the most notable underperformers on the long side."
Some funds that did well from leveraging their bearish views on the market include David Einhorn's Greenlight Capital, which focuses on undervalued stocks and soared 36.6% last year from large short positions against big tech.
U.K.-based Fundsmith, whose GBP22.5 billion ($27.4 billion) equity fund fell 13.8% last year, said in its latest investor letter that its underperformance was down to exiting a "long period of 'easy money'".
CEO Terry Smith explained a period of easy money led to poor investments from people thinking money is "endlessly available", referencing the collapse of crypto exchange FTX and the "meltdown" in tech companies' shares.
Over one-fifth of Fundsmith's portfolio is made up of tech (and tech-adjacent) stocks and Smith attributes some of them to its underperformance last year, mainly from its stake in Meta $(META.UK)$. Meta's stock has fallen 57% in the last year.
According to its most recent 13-F filings, as of Nov. 14, it held 9.2 million shares in Microsoft $(MSFT)$, making up 7.6% of its portfolio. Its combined holdings of Alphabet $(GOOGL)$, Amazon $(AMZN)$, Apple $(AAPL)$, Adobe $(ADBE)$ and Meta amount to 9% of the portfolio.
Going forward, Smith suggested that it was time for these companies to abandon "hugely loss-making" businesses such as Alphabet's Other Bets division.
"There may be a silver lining in this cloud (no pun intended) as this pressure on revenue growth may cause some of the tech companies we invest in to stop behaving as though money is free and halt some of the less promising projects outside their core business," he said.
Smith added that he wasn't about to sell those shares. Referencing Winston Churchill, he said, "'If you are going through hell, keep going'. At Fundsmith we intend to."
Daniel Gladis, CEO of Malta-based Vltava Fund, agreed with Smith on "trimming the corporate fat."
He told investors that he started "cautiously" buying Alphabet shares when the price fell to $90 per share -- approximately around November time.
"It's not yet a price that makes a buyer jump for joy, but it's a reasonable price for a solid company. We see a lot of future potential (perhaps somewhat paradoxically) in trimming the corporate fat that the company has packed on over the past few years," Gladis said.
He added that it might increase its position once Alphabet management mitigates it's rapidly rising costs and begin to run the company with "much greater emphasis on efficiency".
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