Back in 2008, billionaire Warren Buffett made a bet that hedge funds will underperform index funds over the following decade. While the bet still has around a year to run, Buffett seems to be well in the lead to win the $1.0-million bet. While the bet is only between the Vanguard 500 Index Fund Admiral Shares, which tracks the S&P 500 and five unnamed funds of hedge funds picked by Protege Partners, overall the whole hedge fund industry seems to be trailing the indexes. One group of funds that has been in the spotlight over the weak returns are so-called Tiger Cubs, protégés of legendary stock picker Julian Robertson, who underperformed the benchmarks last year, after having dominated the Street for years. One of these funds is billionaire Andreas Halvorsen‘s Viking Global, one of the biggest and most famous activist hedge funds. Viking’s Global Equities Fund lost 4% last year, according to a letter to investors. Its Viking Long Fund posted a gain of 3.9%, but still was lower than MSCI World and S&P 500 Indexes, which advanced by 9% and 12%, respectively. The fund added that it generated negative alpha on both longs and shorts.
“We are very disappointed by these results, which fall well short of our aspirations on both an absolute and a relative basis,” Viking said.
The investor added that the weak results were mainly due to its long bets, with some energy and internet-related investments losing some ground in the fourth quarter and its positions in pharmaceutical companies also performed poorly. We already discussed some of the stocks that Viking is most bullish on based on its latest 13F filing and, in this article, let’s take a closer look at Viking’s comments about Bank of America Corp (NYSE:BAC), Southwestern Energy Company (NYSE:SWN), and Teva Pharmaceutical Industries Ltd (ADR) (NYSE:TEVA).
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Bank of America Corp (NYSE:BAC) is the only company among the three, which is still present in Viking’s equity portfolio. At the end of December, the fund held 9.43 million shares worth $208.45 million, down by 15.68 million shares over the quarter. In the letter, Viking said that Bank of America was its biggest winner last quarter, contributing 0.5% to the performance of both Viking Global Equity and Viking Long Fund. The fund pointed out that the bank “enjoys the leading market share in U.S. retail deposits and has been a conservative underwriter of credit following the financial crisis. The investor also considers that Bank of America is undervalued in relation to its peers, as the company managed to reduce costs and increase its capital base. Viking still sees upside in Bank of America Corp (NYSE:BAC), but reduced the position as the stock rallied in the weeks following the presidential election. Nevertheless, with 139 funds from our database holding $12.49 billion worth of stock, Bank of America Corp (NYSE:BAC) ranked the third most popular stock among hedge funds at the end of December.
On the next page, we’ll see why Viking exited its positions in the other two stocks.
On the other hand, Viking closed its stake in Southwestern Energy Company (NYSE:SWN), having sold 42.26 million shares it had disclosed in its 13F for the end of September. The position was sold as Southwestern was the biggest loser in Viking’s portfolio during the fourth quarter.
“Southwestern, along with many other natural gas equities, underperformed considerably in October due to weakness in the spot price for gas and high levels of gas storage. In spite of the recent, strong recovery in the near-term commodity price, the equities have remained depressed due to an expected pickup in domestic production over the medium to long term,” Viking said.
Nevertheless, the investment in Southwestern Energy Company (NYSE:SWN) generated profits over the full 2016, but the fund exited the position to pursue more attractive investments. Other investors seem generally more bullish on Southwestern, as our data show that the number of investors long the stock jumped by seven to 44 during the fourth quarter. These funds held over 12% of the company’s outstanding stock heading into 2017.
Teva Pharmaceutical Industries Ltd (ADR) (NYSE:TEVA) represented Viking’s largest detractor last year, affecting the returns of both VGE and VLF by 1.8%. Viking had held over 19.68 million shares of Teva at the end of September, but closed the stake in the following three months. In its third-quarter letter to investors, Viking said that it had added Teva to its portfolio following news that it would acquire Allergan’s generic business. The investor was confident that the deal would result in a “best-in-class” generic drugs business and that the market underestimated Teva Pharmaceutical Industries Ltd (ADR) (NYSE:TEVA)’s potential for revenue growth.
“However, we learned about several headwinds during the [third] quarter, including invalidation of a key patent for Teva’s largest franchise, Copaxone, potentially opening it up to generics competition sooner than expected, and the disclosure that the company was claiming fraud in its $2.3 billion acquisition of a Mexican drugmaker. In addition, Teva’s stock traded down following the news that Mylan, its largest publicly traded peer, was facing public criticism over how it priced its largest product, EpiPen,” Viking said.
Overall, Teva Pharmaceutical Industries Ltd (ADR) (NYSE:TEVA) saw the hedge fund sentiment decline during the fourth quarter, as the number of funds from our database bullish on the company fell to 39 from 54, while the aggregate value of their holdings slid to $2.39 billion from $4.25 billion.
Disclosure: none
