Written by AlphaBetaWorks Insights
Our June 2015 piece listed SunEdison (SUNE) and Micron (MU) among the top ten stocks driving hedge fund risk and alpha. In the semiconductor sector, they were virtually the sole drivers. In addition, since mid-2014 semiconductor sector alpha for Hedge Funds has been sharply negative. Extreme semiconductor sector crowding and threat of liquidation were ominous and actionable. Investors armed with capable analytics could have avoided the bulk of their losses (by liquidating), or profited (by shorting); allocators could have asked undifferentiated managers probing questions.
This situation is not unique – liquidations devastated crowded bets across several sectors in 2015. For example, ourJuly analysis highlighted the liquidation of crowded energy stocks. These lessons for investors and allocators apply across sectors and market cycles.
Hedge Fund Crowding in SunEdison (SUNE) and Micron (MU)
SunEdison and Micron were the two major sources of idiosyncratic (stock-specific) risk for hedge funds in the semiconductor sector for some time. For example, MU and SUNE contributed over 90% of stock-specific hedge fund risk in the semiconductor sector in Q3 2014:
Stocks Contributing Most to U.S. Hedge Fund Semiconductor Aggregate Relative Residual Risk in Q3 2014
This continued into the new year, and by Q2 2015, MU and SUNE contributed almost 95% of stock-specific hedge fund risk in the semiconductor sector:
Stocks Contributing Most to U.S. Hedge Fund Semiconductor Aggregate Relative Residual Risk in Q2 2015
The following table contains detailed data on hedge fund semiconductor crowding as of Q2 2015:
Hedge Fund Security Selection in the Semiconductor Sector
The above data is informative and actionable on its own – it points to massive concentration of risk. However, the data becomes more threatening when combined with hedge funds’ semiconductor security selection performance:
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