Some hedge funds face steep losses after betting on the hot sectors

Hedge fund investors are bracing for a river of red ink as firms begin reporting returns for May when the stock market hovered near bear territory on disappointing earnings and worries about aggressive rate hikes, investors and fund managers said. 

Data from Hedge Fund Research shows the HFRX Global Hedge Fund Index slipped 1 per cent in May, leaving it down 3.31 per cent for 2022 till date. But preliminary numbers from some firms show far bigger losses, especially at funds that had invested heavily in technology and biotechnology stocks.

The broader S&P 500 index ended around flat for May, with the Nasdaq index down 2 per cent. However, during the month the S&P fell so far it nearly hit bear market territory. For the year to date, the S&P is down 12 per cent and the Nasdaq down 21 per cent.

Tiger Global, one of the industry's biggest firms, lost 14 per cent in May, leaving it down 52 per cent for the year, an investor said. The firm has lost money every month this year after slipping 7 per cent in 2021.

Similarly, RTW Investments, one of the industry's hottest biotech funds, told investors that performance estimates for its RTW Flagship Fund including designated investments show the portfolio losing 9.51 per cent in May. For the year, it has fallen 34.5 per cent.

Life sciences and biopharma hedge fund Perceptive Advisors lost 19.4 per cent in May, leaving the fund down 41.5 per cent for the year following double digit losses in 2021, according to an investor update.

For many fund managers the damage began long before May when former market darlings reported unexpectedly poor returns. Netflix in April said it lost subscribers for the first time in a decade, sending its share price tumbling 35 per cent in one day. Billionaire investor William Ackman, who banked three years of very strong returns, was caught in the drop and made an abrupt U-turn by liquidating a three month-old $1.1 billion bet on Netflix and locking in a $400 million loss. In May, Ackman's Pershing Square Holdings portfolio lost 9.5 per cent, leaving the fund down 18.2 per cent for the first five months of 2022.

May was also the month where Melvin Capital, once one of the best performers, announced plans to go out of business after being skewered by wrong-footed bets on stocks like GameStop in early 2021.