Fans of tech stocks and train wrecks got to combine their interests in 2012, as several high-profile companies endured an awful year: Shares of Facebook are off 31 percent, Zynga is down 73 percent, and Groupon is at negative 79 percent. Yahoo! struggled, Netflix fell, and even Apple had a rough stretch that lopped off a quarter of its value.
Along the way, some of these stocks became so battered that they began to look like steals to hedge fund managers. The latest example is a 9.9 percent stake in Groupon announced Nov. 20 by Tiger Global Management, the $8 billion hedge fund run by Chase Coleman and Feroz Dewan. The two found something to like in the daily deal company, which has disappointed investors ever since going public in November 2011. Groupon (GRPN) is up in the past two weeks—and so are Facebook (FB), Zynga (ZNGA), and even Research in Motion (RIM), making any fund that bought low look smart.
Tiger’s aggressive move on Groupon came a month after Carl Icahn, the billionaire activist investor, announced a similar-size position in Netflix (NFLX). The streaming video company had lost one-fifth of its value through Oct. 1; it has risen18 percent since Icahn made his stake known.
Bloomberg tracks data on publicly reported holdings in companies—the shares owned by mutual funds, pensions, investment advisers, insiders and the like. For certain high-profile underperformers, the percentage of these shares owned by hedge funds has steadily increased this year. That includes the following companies:
• Facebook, where hedge funds have gone from owning 0.7 percent of publicly reported holdings (on May 27) to 9.41 percent.
• Research in Motion, from 6.96 percent (on Jan. 1) to 9.46 percent.
• Yahoo, from 16.06 percent (on Jan. 1) to 28.73 percent.
• Zynga, from 0.37 percent (on Feb. 5) to 17.05 percent.
There are various reasons for this activity. At Facebook, for example, some of that shift came in the form of Tiger Global converting pre-IPO shares into publicly traded stock. Excluding Tiger Global, though, seven hedge funds reported buying more than 1 million shares of Facebook between June 30 and Sept. 30, while zero funds reported selling that many.
Luxor Capital Group reported a new holding of more than 12 million shares of Zynga on Nov. 14, a stake now worth about $31 million. Highside Capital Management reported a new stake about half that size on the same day. (Other funds, including Apex Capital, fled Zynga.)
Renaissance Technologies upped its stake in RIM, the struggling BlackBerry maker, by nearly 10 million shares in the third quarter of 2012, a period when the company’s stock mostly fell from $10.89 to $7.50. Since Sept. 30 it has climbed 48 percent.
These numbers are drawn from the funds’ Securities and Exchange Commission filings, which can be a pretty crude lens. A Form 13F is required only of funds with $100 million in assets, and it doesn’t list short positions—bets that a stock will lose value. So it’s difficult to speak with any degree of specificity about what hedge funds en masse are doing in any particular category. What this all shows is simply that several billion-dollar funds have spotted value in listings the financial press has enjoyed knocking around this year.
Goldman Sachs (GS) published research on Nov. 19 that measures these shifts differently and arrives at some of the same conclusions. According to the bank’s numbers, hedge funds owned 18 percent of Yahoo’s equity cap at the end of June; by the end of September, that number had grown to 23 percent.
Hedge funds have long held big investments in technology giants such as Apple (AAPL), Google (GOOG), and Microsoft (MSFT). That’s not what we’re talking about here; this recent activity fits into the type of hedgie behavior known as “bottom feeding”—or, more nobly, value investing. The strategy involves identifying companies that the market has undervalued and that could be poised for gains—either all on their own or because the hedge funds agitate for new management or other changes.
Goldman measured which stocks “matter most” to hedge funds, appearing most frequently among their 10 largest holdings. Apple, Google, and Microsoft are Nos. 1, 2, and 4, respectively; Yahoo (YHOO) is now at No. 13. A damaged stock for years, Yahoo has improved since Marissa Mayer took over as chief executive officer this summer. The company has long had significant hedge fund ownership—Daniel Loeb of Third Point used a 6 percent stake to agitate for management changes—and in 2012, new ones are joining in. Tiger Global, York Capital Management, Cadian Capital Management, Greenlight Capital, and other funds all bought millions of shares in the third quarter, according to their filings.
“Technology is interesting to a lot of firms, because the pace of change and innovation can be very rapid,” says Andre Mehta of Cambridge Associates, an alternative investment adviser. “There are companies that can have very binary outcomes, that can be winners or losers, so there are short and long opportunities.”
“In technology you can hit home runs,” says Donald Steinbrugge, a managing partner at Agecroft Partners. “That’s always been the case. What has not always been the case is that technology, from a [price-earnings ratio] standpoint, is fairly inexpensive relative to what it’s been over the last 15 years.”
Like tech stocks, hedge funds are under a fair amount of pressure themselves these days. With a few notable exceptions, including Tiger, which has reportedly gained 25 percent this year, the industry has on average lagged well behind the S&P 500 Index. That means managers have only a few weeks to make up lost ground before the end of the year, when investors may demand to know exactly what brilliant trading insights their fees are paying for. A good old-fashioned value investment—if that’s what these tech stocks prove to be—would help them make the case for a better 2013.
