The 50 largest hedge funds increased their equity exposure by less than 1% in Q3 2013. Excluding the effect of IPO’s—the public offerings of Sprouts Farmers Markets and Athlon Energy primarily benefitted lead shareholder Apollo Capital Management LP—Facebook was the largest individual addition for the group of funds. Facebook had been underperforming the S&P 500 prior to the start of the third quarter, but the company’s July 24th earnings release generated a two-day 28.3% positive price impact on strong growth in active users, earnings, and ad revenue. The largest hedge fund buyers of Facebook in Q3 included Coatue Management (+$0.5 billion), Orbis Investment Management (+$0.4 billion), and Discovery Capital Management (+$0.3 billion), while S.A.C. Capital Advisors LP (-$0.2 billion) and Lone Pine Capital LLC (-$0.1 billion) were among the largest sellers.
Baidu, a Chinese based search and online marketing platform, was also a popular purchase in Q3. Five of the ten largest buyers of Baidu’s Class A sponsored ADR were hedge fund managers, including four within the list of the 50 largest hedge funds: Lone Pine Capital (+$0.8 billion), Viking Global Investors (+$0.4 billion), Coatue Management (+$0.3 billion) and OZ Management (+$0.1 billion). In addition, only one hedge fund was among the top sellers: Orbis Investment Management (-$0.2 billion). The optimism in Baidu represents a reversal from Q2, during which the funds sold a significant portion of their position in the stock. However, Baidu’s ADR has returned over 70% since the end of June—shortly before the company announced that it would buy mobile app store 91 Wireless Websoft.
On the other end of the spectrum, the funds were most bearish in The Boeing Company. This represents a shift because, as recently as the first quarter, the top 50 hedge funds more than doubled their exposure to the stock. The optimism in Q1 proved to be prescient, as Boeing’s stock increased nearly 37% between the end of the first and third quarters (versus 7% for the S&P 500). But, in Q3, the funds reversed course and sold $1.3 billion in exposure. Whether the disposition was well-timed is unclear. Boeing has continued to march upward since the end of Q3, and the stock has generated more than double the return of the S&P 500 during that time. Finally, it’s also important to note that LyondellBasell was actually the largest sale in Q3, but this was due to Apollo Capital winding down its stake in the investment. Two $1.1 billion follow-on offerings were held during the third quarter, which actually represented the fifth and sixth follow-on offerings since the stock went public in October 2010. In addition, another $1.1 billion sale occurred after the end of the third quarter. As a result, Apollo Capital’s stake has fallen from 26.7% to 2.7% over one year.
On the sector-level, the top 50 hedge funds added the most exposure to the Consumer Staples sector. This trend was aided by the IPO of Sprouts Farmers Market, but the funds also increased their position in Procter & Gamble by 80% as well. But even with these additions, the Consumer Staples sector is still the most heavily underweight group relative to the S&P 500 (-3.0 percentage points).On the other end of the spectrum, the most overweight sector continues to be Consumer Discretionary (+8.4 percentage points relative to the S&P 500). The funds further added to this group in Q3, with Kabel Deutschland Holding receiving significant interest. The German cable, internet and phone services company was rumored to be an acquisition target for Vodafone in February, but an offering to purchase a majority stake wasn’t made until late June. Eventually, 76.6% of shares were tendered in the offering as of September 30th. Prior to the offering, Kabel Deutschland had been the subject of acquisition rumors for a while: Vodafone was previously rumored to be in talks in May 2011, and Liberty Global Inc was also rumored to be interested in April of this year.
The addition to Kabel Deutschland to the hedge fund portfolio also had the effect of boosting the funds exposure to Germany equities. On the other end of the spectrum, Brazil and the United States showed the largest decline in equity exposure. The third quarter was the first in at least seven quarters in which the funds did not add exposure to the U.S.