Facebook Plunge Hits Hedge Funds Hard
Last week was a terrible week for hedge funds. The troubled industry, plagued by rock bottom returns and investor frustration, may have been among the hardest hit by the recent plunge in the price of Facebook (FB) shares. When the social media company dropped significantly in price last week, many hedge funds were left holding outsize bets that were suddenly losing propositions.
Facebook Dropped By 19%
On Thursday, July 26, Facebook shares dropped by 19%, after the company suggested it will slower growth in the near future. Overall, Facebook is down 0.9% this year, making it the weakest of the so-called FANG stocks. By comparison, Netflix (NFLX) has climbed by 85%, while Amazon.com Inc. (AMZN) has gained more than 55% on the year and Alphabet (GOOGL) has risen by 18.9%.
Hedge Funds Impacted
When Facebook’s sudden dip occurred, hedge funds suffered. According to a report by the New York Post, more than 10% of hedge funds surveyed by Goldman Sachs have Facebook as a top-10 holding. In many cases, these are massive bets on FB stock; the larger the bet, the harder Facebook’s decline hit.
On the other hand, it appears that mutual funds were less likely to be impacted to the same degree. Mutual funds have reportedly been cutting back on their positions in FANG companies since sometime in late 2016, according to the report. Goldman analysts wrote that “most investors believe that mutual funds are overweight the popular FANG stocks, when in fact the opposite is true.”
Mutual funds, while heavily invested as a group in Google, tend to be underweight in the FANG group, making their performance relative to a benchmark like the S&P 500 appear better. Goldman analysts noted that “large-cap mutual funds have usually outperformed the S&P 500 on a day when one or more of the FANG stocks has declined by [more than 5%.]”
Goldman’s analysis of the hedge funds in question relied on data generated by 13F-filings for the first quarter of the year. Because 13F reports for the second quarter are not yet due to the SEC, it’s possible that some of the hedge funds involved may have reduced their stakes in Facebook in recent months. Those money managers able to predict Facebook’s plunge may even have gained money on the move. However, it’s also possible that individual funds or the hedge fund industry as a whole may have lined up additional bets on Facebook in recent weeks, meaning that Thursday’s drop may have hit even harder than previously thought.
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