Apple's Stock Drop Might Bite Hedge Funds Badly

Date: Friday, January 25, 2013
Author: Nathan Vardi, Forbes

Last year the billionaire hedge fund manager David Einhorn predicted that Apple’s market capitalization could hit $1 trillion. He long ago made Apple one of his hedge fund’s biggest holdings and in a letter dated just two days ago Einhorn told his investors he had purchased more Apple shares as the price declined late last year. “We used the lower prices as an opportunity to repurchase the shares we sold in the third quarter,” Einhorn wrote.

Einhorn’s hedge fund was down 4.9% net of fees in the fourth quarter of 2012, thanks partly to the performance of Apple’s shares. “Our Apple was bruised,” he noted to his investors. The question now is, will Apple sink Einhorn and other hedge funds in 2013?

Einhorn’s hedge fund peformance, by his own account, was “pedestrian” last year. Like most hedge funds, Einhorn’s Greenlight was up in 2012, but it underperformed the U.S. stock market. In Einhorn’s case he was up 7.9% net of fees while the S&P 500 returned 16%. That’s actually a little better than the average hedge fund.

Despite underperforming the U.S. stock market for four straight years, the hedge fund industry has found success betting on Apple, enjoying the stock’s incredible performance as it rose from $200 to $500 and eventually reaching $700 per share. It has been, by far, the most popular stock among hedge fund managers, who are paid rich fees by their investors, since 2010. For a few hedge fund managers, like Tiger Global’s Chase Coleman, Apple helped fuel some fantastic overall annual returns. For most hedge fund managers, however, holdings in Apple simply mitigated some bad bets elsewhere in the portfolio.

Apple’s stock opened more than 10% lower in Thursday morning trading after the company reported some disappointing quarterly financial results on Wednesday after the U.S. stock market closed—disappointing by Apple’s standards. The technology behemoth’s market capitalization is now about $430 billion, which is huge, but far away from $1 trillion. The stock is now down nearly 14% in 2013.

How much of a problem will this be for hedge funds? We will have a much better idea once hedge funds report their end of the year long stock portfolios in February. It is very possible that some smart hedge fund managers have been unloading their Apple stock for weeks and are partly responsible for the drop in Apple’s stock—but given how crowded this trade was in hedge fund land there is a strong likelihood that some hedge fund managers have hung onto much of their Apple holdings. Einhorn certainly left the impression in his January 22nd letter to his investors that he remains very long Apple. Those who did retain a robust Apple stock holding could have some real performance problems yet again in 2013—the S&P 500 has started out very strongly this year and is up more than 5% in January. Apple’s stock performance could doom a lot of hedge fund managers in 2013 right from the start.