• Hedge funds have already seen $20 billion more in outflows this year compared to 2018 as investors seek lower fees and better performance, Bloomberg reported.
• The funds lost $8.4 billion from investor outflows in July, hitting a net withdrawal of $55.9 billion year-to-date. Investors pulled $37.2 billion in all of 2018.
• The best-performing category was event-based funds, which has seen a net inflow of $10.3 billion year-to-date.
• Visit the Markets Insider homepage for more stories.

Hedge funds are already making 2018's multibillion-dollar outflows look appealing.

The institutions have collectively seen $55.9 billion pulled from their funds this year, up from $37.2 for all of last year, Bloomberg reported, citing eVestment data. Investors took back $8.4 billion in July.

The industry's losses are not evenly distributed, with 37% of hedge funds bringing net inflows throughout the year. Long/short equity funds have been hit the hardest, with investors collectively yanking $25.5 billion year-to-date. These funds focus on shorting stocks analysts deem overpriced while taking long positions on underpriced equities.

The funds most insulated from the year's exodus have been event-driven funds, Bloomberg reported. The category saw $10.3 billion in net inflows through July. Event-driven funds make money through mergers, takeovers, bankruptcies, and other events that move stocks.

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More hedge funds have closed their doors than started in each of the last three years, Bloomberg reported. Investor frustrations have pushed management fees lower as funds look to boost their customers' returns.

Goldman Sachs recently warned hedge funds that recession fears and subsequent crowding into popular stocks could set the industry up for disaster. The analysts found hedge funds' portfolio density creeping higher in recent months, risking a massive selloff should any of the crowd-favorite companies tank.

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• Hedge funds disclosed their most recent holdings in public filings earlier this month, providing a window into which companies some of the world's most successful money managers are betting on.
• Goldman Sachs put together a list of the stocks that appear most frequently in the top 10 largest holdings within hedge fund portfolios. 
• The "Hedge Fund VIP List" features the top long positions of fundamentally-driven hedge funds, excluding firms that use quantitative strategies or attempt to mirror private equity investments. 
• Here are 12 companies most loved by hedge funds in the second quarter.
• Visit the Markets Insider homepage for more stories.

Earlier this month, hedge funds revealed which public companies they bought and sold during the second quarter. 

Hedge funds are required to disclose stakes in public companies four times a year, following the end of each quarter. Goldman Sach's created a list of the top stocks these money managers purchased in the second quarter based publicly-available 13F filings.

Goldman's "Hedge Fund VIP List" includes the top long positions of fundamentally-driven hedge funds. The firm's analysis was limited to funds with between ten and 200 equity positions in effort to exclude funds that apply quantitative strategies or attempt to mirror private equity investments.

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When hedge funds show interest in a particular stock, its often a good sign, according to Goldman's analysis. 

"Changes in popularity with hedge fund investors can be strong signals for future stock performance," the firm said in the report. 

Here the 12 stocks most loved by hedge funds in the second quarter, ranked in increasing order of how many have them in their top 10 holdings:

12. Allergan

Ticker: AGN

Industry: Pharmaceuticals

Year-to-date return: 20%

Number of funds with stock as top 10 holding: 27

Source: Goldman Sachs

11. Comcast

Ticker: CMCSA

Industry: Cable & Satellite

Year-to-date return: 28%

Number of funds with stock as top 10 holding: 29

Source: Goldman Sachs

10. Mastercard

Ticker: MA

Industry: Data processing & outsourced services

Year-to-date return: 46%

Number of funds with stock as top 10 holding: 33

Source: Goldman Sachs

9. Visa

Ticker: V

Industry: Data Processing & Outsourced Services

Year-to-date return: 36%

Number of funds with stock as top 10 holding: 36

Source: Goldman Sachs

8. Netflix

Ticker: NFLX

Industry: Movies & Entertainment

Year-to-date return: 13%

Number of funds with stock as top 10 holding: 39

Source: Goldman Sachs

7. Disney

Ticker: DIS

Industry: Movies & Entertainment

Year-to-date return: 24%

Number of funds with stock as top 10 holding: 41

Source: Goldman Sachs

6. Celgene

Ticker: CELG

Industry: Biotechnology

Year-to-date return: 48%

Number of funds with stock as top 10 holding: 44

Source: Goldman Sachs

5. Alphabet

Ticker: GOOGL

Industry: Interactive Media & Services

Year-to-date return: 13%

Number of funds with stock as top 10 holding: 46

Source: Goldman Sachs

4. Alibaba

Ticker: BABA

Industry: Internet & Direct Marketing Retail 

Year-to-date return: 27%

Number of funds with stock as top 10 holding: 54

Source: Goldman Sachs

3. Microsoft

Ticker: MSFT

Industry: Systems Software

Year-to-date return: 36%

Number of funds with stock as top 10 holding: 70

Source: Goldman Sachs

2. Facebook

Ticker: FB

Industry: Interactive media & services

Year-to-date return: 40%

Number of funds with stock as top 10 holding: 71

Source: Goldman Sachs

1. Amazon

Ticker: AMZN

Industry: Internet & Direct Marketing Retail

Year-to-date return: 19%

Number of funds with stock as top 10 holding: 95

Source: Goldman Sachs

• The best-performing hedge fund of 2019 has seen the value of its portfolio increase 278% since the start of the year, according to Bloomberg. 
• The Vanda Global Fund, a Singapore-based firm run by Chong Chin Eai, manages about $194 million and trades on Swiss-Asia Asset Management's fund management platform. 
• The fund specializes in exchange-traded futures across a variety of asset classes including equities, commodities, and government bonds. 
• Visit the Markets Insider homepage for more stories. 

The top-performing hedge fund of 2019 has skyrocketed 278% since the start of the year, according to Bloomberg. 

The Singapore-based Vanda Global Fund, which is run by Chong Chin Eai and manages about $194 million, specializes in exchange-traded futures that track commodities, equities, and government bonds. 

Futures are typically considered a more risky investment compared to purchasing a share of stock or a corporate bond, as they involve a contract to buy or sell shares of an underlying security at an agreed-upon price or specific date in the future. Exchange-traded futures are a form of derivatives based on existing ETFs, which typically track a basket of assets like stocks or bonds.

The volatility of investing in futures can been seen in Vanda's returns for the past two years. Vanda rose 260% in 2017, but fell 49% in 2018, according to Bloomberg. 

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Chong started the fund about three years ago with $24 million from friends and family, Bloomberg reported. The fund cratered 50% after Donald Trump's presidential victory rocked the stock market in late-2016, and Chong contemplated closing the firm and dipping into his own personal savings to recuperate his investors' losses. 

"A lot of fund managers would've just given up after six months to start a brand new track record," Chong told Bloomberg. "But I wanted to show investors the flow of the fund and the growth of the fund, both in terms of the performance and also in myself."

Vanda has between 10 and 15 investors, and is looking to raise an additional $20 million in capital over the next year, Bloomberg reported. Investors who chip in more than $1 million will have to pay a 2% management fee and a 20% performance fee. For those that invest the minimum of $250,000, the cost rises slightly to a 2.5% subscription fee and a 25% performance fee.

In an effort to hedge against the risk of investing in ETF futures, Chong puts half of the fund into highly-liquid money market investments that yield a small interest rate.

The firm trades on Swiss-Asia Asset Management's fund management platform. 

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• D.E. Shaw in April asked employees to sign noncompete contracts by mid-September. The hedge-fund manager had "nonsolicit" contracts before but hadn't required noncompetes for all investment staff. 
• The firm has since made the original noncompete contracts more employee-friendly by changing how deferred compensation is paid out, sources inside the firm told Business Insider. 
• The noncompetes also give investment staff the option of walking away from the $50 billion hedge-fund manager with all deferred compensation paid out immediately, adding to the already high stakes D.E. Shaw is facing to retain talent. 
• Click here for more BI Prime stories.

D.E. Shaw has relaxed terms of its deferred-compensation structure ahead of a mid-September deadline on the firm's new noncompete contract for all investment staff to either sign the agreement or get fired, insiders said. 

The move spotlights uncertainty inside D.E. Shaw as it prepares to enforce wide noncompetes, which are fairly common in the hedge-fund industry, for the first time in its 30-year history. At stake is the $50 billion hedge-fund manager's investment talent — sources told Business Insider how longtime employees were assessing the terms and weighing if it makes sense to get pushed out and join a competitor. 

Three people who were asked to sign noncompetes at D.E. Shaw told Business Insider they have not yet signed the agreement and described wider pushback from staff. They also said they viewed the changes to the deferred-compensation structure as a bid by senior management to get more people to sign.

The Financial Times first reported in the beginning of June that D.E. Shaw had set a mid-September deadline for workers to sign noncompetes. On July 23, D.E. Shaw told workers it had revised the terms of the deferred-compensation plan for employees that leave the firm voluntarily, including letting employees keep more of their deferred compensation as long as they wait out their noncompete time frame between jobs, several sources told Business Insider. 

Before April, the firm's employment agreement required only nonsolicit agreements, meaning employees that left had to hold off on recruiting former colleagues and investors. D.E. Shaw had told staff that a noncompete put it in line with the broader hedge-fund industry, according to the FT report.

To be sure, the three insiders also told Business Insider that they knew of colleagues who had signed immediately once the original terms were revealed. And a source familiar with the firm's senior management told Business Insider that "dozens" of employees were returning signed contracts weekly. 

D.E. Shaw declined to comment when asked by Business Insider about the employee response to the noncompete and changes to the contract. 

Jason Zuckerman, a Washington-based lawyer that has represented hedge-fund employees in contract disputes, said that adding a noncompete after the fact to an employee contract was relatively uncommon. New York law requires noncompete clauses to "be no greater than needed to protect the legitimate interest of the employer," he said.

The three people working at D.E. Shaw also said people could leave the firm with their entire deferred pay intact if they did not sign the agreement, giving them optionality to wait right up to the deadline and take advantage of a better opportunity. 

"We see it as a type of career 'put' option," one person said. "Anyone who wants to bet on themselves is not going to sign."

In the FT report in June, the firm denied the noncompete deadline was related to the departure of former D.E. Shaw managing director Dan Michalow. His nonsolicit agreement runs out the same day employees will be required to sign noncompetes, after which Michalow would be able to recruit D.E. Shaw investors and employees if he were to start his own venture. 

Michalow left the firm in March 2018 after an investigation into allegations of inappropriate behavior, but he has fought the characterization of his departure and filed a defamation suit against the firm. He declined to comment for this story beyond pointing to a line in a memo to employees that D.E. Shaw's executive committee sent last year about his departure:"It's hard to overstate how seriously we take our responsibility to ensure that DESCO is a good place to work."

Read more: Inside D.E. Shaw's special relationship with Blackstone, which shines a light on the power the hedge fund industry's largest investors have

The noncompete time frames D.E. Shaw is asking employees to agree to range from three months to a year, meaning they can't start a new job until that time expires. But even under the new compensation terms, unless employees don't take another job for three years, they won't collect all of their deferred pay.

During the noncompete period, D.E. Shaw pays employees 150% of their salary and continues to provide health insurance, a source familiar with the agreement said, which is generous compared with industry standards.

The sources inside the firm who have not yet signed said their focus was on the deferred compensation, however, because most of their total pay — as is common in the hedge-fund industry — is paid out in bonuses that go into the deferred pool.

While other high-profile hedge funds also pay deferred compensation out over several years, most pay the full amount as long as the noncompete time frame is completed, according to two industry sources and one source at D.E. Shaw.

"It used to be that they kept your money, and that was your incentive to not leave, while other firms kept your time," one source inside the firm said. "Now they keep your money and your time." 

In the latest version of D.E. Shaw's deferred-compensation plan, if an employee leaves voluntarily, their deferred compensation is paid out at year-end over three years. If they start a new job after the noncompete period expires, they forfeit any compensation they have not yet received.

Under the terms of the long-running deferred-pay plan, an employee who started working at another hedge fund in the same calendar year that they left D.E. Shaw would forfeit any deferred compensation owed up until that point — even if they waited out the new mandated noncompete time period.

The people working at D.E. Shaw said they had felt pressured to sign without being able to offer feedback, with one person saying they felt there was a "double standard" with regard to how staff was expected to perform strategically in their jobs versus making decisions about the contract. 

The three people at the firm described the new deferred comp as an improvement from the employee perspective but said there was still a feeling of uncertainty around how many people would ultimately agree to the noncompete.

"It's a little bit of a golden ticket," a source inside the firm said of the ability for people to keep their deferred compensation if they don't sign. "It's basically let everyone go out and get a market check on what they're worth." 

Read more: The booming private market has some hedge funds spreading into private equity's domain. Now a tug-of-war has broken out over talent.

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• Ray Dalio's primary hedge fund shed 6% of its value this year as of August 23, according to a new report from Bloomberg. 
• Dalio's Pure Alpha fund, which invests in macroeconomic trends, took significant losses from bearish bets on global interest rates. 
• While Dalio's funds are struggling, other macro managers are capitalizing on investment opportunities sprouting from geopolitical uncertainties.
• Visit the Markets Insider homepage for more stories. 

One of Ray Dalio's main hedge funds is struggling this year. 

The Bridgewater Associates founder's Pure Alpha fund lost 6% of its value through August 23, according to a new report from Bloomberg. 

The fund invests based on macroeconomic trends and has experienced losses from bearish bets on global interest rates, Bloomberg reported, citing a person familiar with the matter. An offshoot of the flagship fund, dubbed Pure Alpha II, invests with higher leverage and had lost about 9% of its value as of August 23. 

While Dalio's macro funds appear to be struggling, competing firms are capitalizing on opportunities stemming from geopolitical uncertainties. According to data from Bloomberg, macro funds have risen 4.7% this year through July. 

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Bridgewater's Pure Alpha Major Markets fund has seen even bigger losses this year, falling about 18% through August 23. The All Weather Fund, which invests about half of the firm's capital in wide range of stocks, bonds, and currencies to buffer against volatile markets, is up about 12.5% this year, according to Bloomberg. 

Dalio said in a recent LinkedIn post that he's concerned monetary policy might be ineffective in preventing the next recession because interest rates are already so low. 

Bridgewater Associates is the world's largest hedge fund with around $160 billion in assets. 

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• Michael Burry, of "The Big Short" fame, foresaw the 2008 housing meltdown and bet against the subprime-mortgage bonds that exacerbated the crisis.
• Burry now runs his own hedge fund — Scion Asset Management — out of Cupertino, California.
• Listed below are his firm's 15 largest investments, according to data compiled by Bloomberg.
• Visit the Markets Insider homepage for more stories.

Michael Burry earned millions by betting against subprime-mortgage bonds in advance of the 2008 housing meltdown. 

His short trade was popularized by Michael Lewis' bestselling book "The Big Short," and the movie in which he was portrayed by Christian Bale. 

These days, he runs Scion Asset Management, a Cupertino, California-based hedge fund that owns $93.6 million worth of assets.

He hasn't stopped sounding alarms where he sees them. Most recently, Burry warned that passive investing is a "bubble."

His comments related to the trend of hedge funds and index-fund managers piling into a small collection of large-cap companies. The consolidation of capital leaves smaller growth stocks desperate for cash, Burry said.

"The bubble in passive investing through ETFs and index funds as well as the trend to very large size among asset managers has orphaned smaller value-type securities globally," he told Bloomberg.

Burry is doing some active stock picking of his own, and recently told Barron's he was going long on GameStop.

The list below shows his firm's 15 largest positions by descending order of market value, according to data from regulatory filings and news reports compiled by Bloomberg.

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1. Autech

Market value: $14.76 million

Position: 1,500,000 shares

Ownership stake: 9.75% of shares outstanding

Year-to-date performance: up 13%

Source: Bloomberg

2. Western Digital

Market value: $13.77 million

Position: 250,000 shares

Ownership stake: .08% of shares outstanding

Year-to-date performance: up 54%

Source: Bloomberg

3. GameStop

Market value: $12.69 million

Position: 3,000,000 shares

Ownership stake: 3.32% of shares outstanding

Year-to-date performance: down 68%

Source: Bloomberg

4. Alphabet Inc. Class C

Market value: $10.74 million

Position: 9,000 shares

Ownership stake:<0.01% of shares outstanding

Year-to-date performance: up 14%

Source: Bloomberg

5. Tailored Brands

Market value: $9.66 million

Position: 2,600,000 shares

Ownership stake: 5.15% of shares outstanding

Year-to-date performance: down 61%

Source: Bloomberg

6. FedEx

Market value: $9.45 million

Position: 60,000 shares

Ownership stake: .02% of shares outstanding

Year-to-date performance: down 1%

Source: Bloomberg

7. Sansei Technologies

Market value: $9.39 million

Position: 1,104,000 shares

Ownership stake: 5.71% of shares outstanding

Year-to-date performance: down 50%

Source: Bloomberg

8. Cleveland-Cliffs

Market value: $8.77 million

Position: 1,100,000 shares

Ownership stake: .41% of shares outstanding

Year-to-date performance: up 3%

Source: Bloomberg

9. Alibaba

Market value: $8.64 million

Position: 50,000 shares

Ownership stake:<0.01% of shares outstanding

Year-to-date performance: up 27%

Source: Bloomberg

10. Cardinal Health

Market value: $8.45 million

Position: 200,000 shares

Ownership stake: .07% of shares outstanding

Year-to-date performance: down 4%

Source: Bloomberg

11. Walt Disney Co.

Market value: $8.27 million

Position: 60,000 shares

Ownership stake:<0.01% of shares outstanding

Year-to-date performance: up 25%

Source: Bloomberg

12. Sportsman's Warehouse Holdings

Market value: $6.52 million

Position: 1,597,011 shares

Ownership stake: 3.71% of shares outstanding

Year-to-date performance: down 4%

Source: Bloomberg

13. Yotai Refractories

Market value: $6.35 million

Position: 1,280,000 shares

Ownership stake: 5%

Year-to-date performance: down 9%

Source: Bloomberg

14. Tazmo

Market value: $6.03 million

Position: 686,800 shares

Ownership stake: 5.08%

Year-to-date performance: up 39%

Source: Bloomberg

15. Ezwelfare

Market value: $4.72 million

Position: 574,000 shares

Ownership stake: 5.27% of shares outstanding

Year-to-date performance: up 30%

Source: Bloomberg

• Michael Burry, of "The Big Short" fame, foresaw the 2008 housing meltdown and bet against the subprime-mortgage bonds that exacerbated the crisis.
• Burry now runs his own hedge fund — Scion Asset Management — out of Cupertino, California.
• Listed below are his firm's 15 largest investments, according to data compiled by Bloomberg.
• Visit the Markets Insider homepage for more stories.

Michael Burry earned millions by betting against subprime-mortgage bonds in advance of the 2008 housing meltdown. 

His short trade was popularized by Michael Lewis' bestselling book "The Big Short," and the movie in which he was portrayed by Christian Bale. 

These days, he runs Scion Asset Management, a Cupertino, California-based hedge fund that owns $93.6 million worth of assets.

He hasn't stopped sounding alarms where he sees them. Most recently, Burry warned that passive investing is a "bubble."

His comments related to the trend of hedge funds and index-fund managers piling into a small collection of large-cap companies. The consolidation of capital leaves smaller growth stocks desperate for cash, Burry said.

"The bubble in passive investing through ETFs and index funds as well as the trend to very large size among asset managers has orphaned smaller value-type securities globally," he told Bloomberg.

Burry is doing some active stock picking of his own, and recently told Barron's he was going long on GameStop.

The list below shows his firm's 15 largest positions by descending order of market value, according to data from regulatory filings and news reports compiled by Bloomberg.

Markets Insider is looking for a panel of millennial investors. If you're active in the markets, CLICK HERE to sign up.

1. Autech

Market value: $14.76 million

Position: 1,500,000 shares

Ownership stake: 9.75% of shares outstanding

Year-to-date performance: up 13%

Source: Bloomberg

2. Western Digital

Market value: $13.77 million

Position: 250,000 shares

Ownership stake: .08% of shares outstanding

Year-to-date performance: up 54%

Source: Bloomberg

3. GameStop

Market value: $12.69 million

Position: 3,000,000 shares

Ownership stake: 3.32% of shares outstanding

Year-to-date performance: down 68%

Source: Bloomberg

4. Alphabet Inc. Class C

Market value: $10.74 million

Position: 9,000 shares

Ownership stake:<0.01% of shares outstanding

Year-to-date performance: up 14%

Source: Bloomberg

5. Tailored Brands

Market value: $9.66 million

Position: 2,600,000 shares

Ownership stake: 5.15% of shares outstanding

Year-to-date performance: down 61%

Source: Bloomberg

6. FedEx

Market value: $9.45 million

Position: 60,000 shares

Ownership stake: .02% of shares outstanding

Year-to-date performance: down 1%

Source: Bloomberg

7. Sansei Technologies

Market value: $9.39 million

Position: 1,104,000 shares

Ownership stake: 5.71% of shares outstanding

Year-to-date performance: down 50%

Source: Bloomberg

8. Cleveland-Cliffs

Market value: $8.77 million

Position: 1,100,000 shares

Ownership stake: .41% of shares outstanding

Year-to-date performance: up 3%

Source: Bloomberg

9. Alibaba

Market value: $8.64 million

Position: 50,000 shares

Ownership stake:<0.01% of shares outstanding

Year-to-date performance: up 27%

Source: Bloomberg

10. Cardinal Health

Market value: $8.45 million

Position: 200,000 shares

Ownership stake: .07% of shares outstanding

Year-to-date performance: down 4%

Source: Bloomberg

11. Walt Disney Co.

Market value: $8.27 million

Position: 60,000 shares

Ownership stake:<0.01% of shares outstanding

Year-to-date performance: up 25%

Source: Bloomberg

12. Sportsman's Warehouse Holdings

Market value: $6.52 million

Position: 1,597,011 shares

Ownership stake: 3.71% of shares outstanding

Year-to-date performance: down 4%

Source: Bloomberg

13. Yotai Refractories

Market value: $6.35 million

Position: 1,280,000 shares

Ownership stake: 5%

Year-to-date performance: down 9%

Source: Bloomberg

14. Tazmo

Market value: $6.03 million

Position: 686,800 shares

Ownership stake: 5.08%

Year-to-date performance: up 39%

Source: Bloomberg

15. Ezwelfare

Market value: $4.72 million

Position: 574,000 shares

Ownership stake: 5.27% of shares outstanding

Year-to-date performance: up 30%

Source: Bloomberg

• The investor Michael Burry rose to fame by shorting mortgage securities ahead of the 2008 housing meltdown.
  
• His wager was heavily featured in Michael Lewis' bestselling book "The Big Short," and Christian Bale portrayed Burry in the 2015 film adaptation.
  
• Burry currently has several active investments in small- and medium-sized Japanese companies, Bloomberg reported Wednesday.
• The Japanese stocks he chose have "significant cash or stock holdings" he wants to see used for share buybacks or acquisitions, Bloomberg found.
• Burry recently warned against passive investment being a "bubble" that keeps capital away from growth stocks and consolidates investment in large-cap companies.
• Here are the eight Japanese companies targeted by Burry, ranked in descending order of market cap.
• Visit the Markets Insider homepage for more stories.

The famous investor Michael Burry is targeting small- and medium-cap Japanese companies as he shifts his strategy to international value stocks, according to a new Bloomberg report.

Burry made waves when he bet against mortgage-backed securities ahead of the 2008 housing crisis. The hugely profitable trade was depicted in Michael Lewis' bestseller "The Big Short," which saw a film adaptation in 2015 with Christian Bale playing Burry.

Michael Burry recently warned passive investment is a "bubble" that keeps small-cap companies struggling for cash. The manager is now "100% focused on stock-picking" after exiting investments in farmland and water, Bloomberg reported. He recently disclosed major stakes in US and South Korean value stocks through his hedge fund, Scion Asset Management.

Burry is also specifically focused on Japanese stocks, particularly those with large cash reserves, Bloomberg found. The investor says he's encouraging companies to utilize their holdings, a move that could draw increased interest from international investors. 

"I want to see evidence that the company is investing to grow the business, buying back stock, paying dividends, or making accretive acquisitions," Burry wrote in an email to Bloomberg.

Here are eight Japanese companies Burry has stakes in, by descending market cap:

Markets Insider is looking for a panel of millennial investors. If you're active in the markets, CLICK HERE to sign up.

Kanamoto

Market cap (USD): 982.15 million

Year-to-date performance: down 8%

The company leases construction machinery and tools.

"They run a tight ship from a credit perspective, and maintain their equipment for high resale at auction," Burry told Bloomberg.

Tosei

Market cap (USD): $578.48 million

Year-to-date performance: up 52%

Burry called Tosei an "opportunistic player in urban real estate," praised its management, and noted the company is "executing in every facet of the business."

Altech

Market cap (USD): $334.34 million

Year-to-date performance: down 1%

Altech "will benefit from recent immigration reforms as it expands into agriculture and patient care areas," Burry told Bloomberg. The company provides mechanics and engineers for-hire to a growing portfolio of industries.

Murakami

Market cap (USD): $277.53 million

Year-to-date performance: up 3%

The car mirror company forecasts growth and stock buybacks, but it won't be enough help the shares recover from a 35% drop in 2018, Burry said.

"Situations like that call for more dramatic action, and I'd like to see large tender offers for one-third or more of the shares, large special dividends. I just have not seen that, and there is a long way to go."

Nippon Pillar Packing

Market cap (USD): $254.22 million

Year-to-date performance: down 9%

Burry forecasts the stock surging on "a high beta to the sector as the inventory of tech components is finished off and growth resumes." Nippon produces mechanical seals, gaskets, and packing supplies, according to Bloomberg.

Sansei Technologies

Market cap (USD): $195.15 million

Year-to-date performance: down 49%

The company "should pay down debt to improve cash flow and to put it in a position for another acquisition," Burry told Bloomberg. Sansei makes elevators and theme park rides.

Yotai Refractories

Market cap (USD): $129.64 million

Year-to-date performance: down 3%

Yotai produces materials used in electric furnaces, and should buy back stock with its 4.4 billion yen reserves, Burry said.

Tazmo

Market cap (USD): $116.63 million

Year-to-date performance: up 64%

The producer of chip-making tools "needs to invest in its business to develop the potential of the markets it serves," Burry told Bloomberg.

• Spruce Point Capital issued a report saying it believes the stock price of Church & Dwight, the maker of Trojan condoms, Arm & Hammer baking soda, and several other consumer brands, is overvalued. Spruce Point has a short position in Church & Dwight, and benefits if the shares fall.
• The $270 million short-seller flagged the company's reliance on brick-and-mortar stores and declining sales in old and new brands, and said that it had paid too much for recent acquisitions. 
• Other brands owned by Church & Dwight include hair removal cream Nair, cleaning material OxiClean, First Response pregnancy tests, and laundry detergent Xtra. 
• Click here for more BI Prime stories.

A new report from short-seller Spruce Point Capital is targeting Church & Dwight, the maker of Trojan condoms.  

Church & Dwight, which also owns Arm & Hammer baking soda, Nair hair removal cream, and pregnancy test kit First Response, has been active in M&A since CEO Matthew Farrell took over in 2016.

Acquisitions include a $1 billion deal for flossing technology Waterpik in 2017  — and Spruce Point called that a "significant" overpay. Spruce Point has taken a short position in Church & Dwight, and benefits if the shares fall.

Church & Dwight also inked an agreement this year to buy FLAWLESS, another hair removal company. That arrangement includes $475 million in cash plus an earn-out, meaning the total price tag could balloon to $900 million in 12 months if sales targets are hit, a statement announcing the deal said.

Church & Dwight did not immediately respond to requests for comment.

See more:A short seller says the company that sells wedding rings to much of America is overvalued, and he's betting that Amazon will steal its business

Spruce Point Capital, the $183 million short-seller run by Ben Axler, notched solid returns in 2018. The firm made 24% in a year when most hedge funds lost money. 

Spruce Point's new report argued that Church & Dwight's stock price is 35% to 50% higher than where it should be. The company, according to the short-seller report, is too reliant on brick-and-mortar stores to sell its core products, many of which have been declining in sales — like Trojan condoms, OxiClean, and Xtra laundry detergent. 

Of the 11 long-term brands that Church & Dwight has acquired since 2001, only Arm & Hammer and dry shampoo-maker Batiste are considering to be trending up, according to Spruce Point. 

Spruce Point said that it believes shares of the company could fall to roughly $40-$52. Shares are currently trading around $76, down some 5% on the day.

Spruce Point Capital has also targeted Pennsylvania-based grocery store chain Weis Markets, diabetes monitoring device-maker Dexcom, and Burlington Stores, which runs clothing retailer Burlington Coat Factory. The firm announced its first long position, in healthcare products distributor Henry Schein, in three years last summer. 

See more: Arts-and-crafts retailer Michaels is under fire from a short-seller who says Amazon and Framebridge are threatening its framing business

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• The billionaire Ray Dalio — the founder of Bridgewater Associates, the world's largest hedge fund — told Bloomberg he sees a 25% chance of recession in 2019 and through 2020.
• He cited the effectiveness of central-bank policies, the wealth gap, the 2020 US elections, and the economic emergence of China as key factors in deciding the intensity of the next economic downturn.
• The Bridgewater founder also warned the Fed should slowly cut rates by small increments.
• Visit the Markets Insider homepage for more stories.

Ray Dalio told Bloomberg he sees a 25% chance of economic recession in the rest of the year and through 2020, and that central banks can only do so much to avert it.

Dalio — who founded Bridgewater Associates, the world's largest hedge fund — listed four separate factors that he believes will affect the severity of the next economic downturn. The combined variables are "unique" and haven't existed since the 1930s, Dalio said on "The David Rubenstein Show."

The factors are:

• Effectiveness of central-bank policies
• The wealth gap, which will affect how the next recession will look "socially, politically, and so on"
• The 2020 elections, which he called "an issue between capitalists and socialists, or the rich and the poor"
• The emergence of China in relation to the US

The billionaire added that central banks around the world "have to face the fact that when the next downturn comes there will not be the power to reverse it in the same way" they recovered from the 2008 financial crisis. He recommended the Fed cut interest rates slowly and by small increments instead of rushing to invigorate the US economy.

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The Fed cut interest rates for the first time since the financial crisis on July 31, with Fed Chairman Jerome Powell calling the move a "mid-cycle adjustment."

Though President Trump has repeatedly pushed for large rate cuts, he's likely to be disappointed by the Federal Open Market Committee's September 18 meeting. The national economy is "relatively strong," and rapidly cutting the interest rate could be costly in the future, Boston Fed President Eric Rosengren told The Washington Post on Tuesday.

"You don't want to apply accommodation at a time when you don't need it, in part because you won't have it when you do need it and in part because there are side effects from pushing interest rates very low. It encourages people to take more risk," Rosengren said. 

Bridgewater's main hedge fund — Pure Alpha — is reportedly down about 6% as of August 23, despite other macro-focused funds rising through 2019. Bridgewater has about $160 billion in managed assets.

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• A new lawsuit between D.E. Shaw and a former portfolio company unveils both the complicated dealmaking that has come to be a part of many large-scale hedge funds and the difficulties in valuing private companies.
• The suit alleges that the $50 billion hedge fund sold off a litigation finance unit at a discount and that the unit's founder did not receive the same payout as other equity holders.
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An ongoing legal battle between the high-powered hedge fund D.E. Shaw and a former executive is shining light on the difficulty of valuing private companies.

Gary Chodes, the founder of Oasis Financial, a player in the booming litigation finance space, is suing the $50 billion hedge fund, claiming that it sold Oasis in a hurry for less than what it was worth. D.E. Shaw bought a majority stake in Oasis in 2007 through a fund known as D.E. Shaw Composite Side Pocket, and it sold the company to the private-equity manager Parthenon in 2016.

Side-pocket funds are used by hedge funds as their own internal private-equity vehicle, which have longer timelines than many funds' traditional strategies. These funds are not meant to be long-lasting products — they often close once an investment thesis plays out.

Chodes also claims that equity holders in the side-pocket fund D.E. Shaw used to buy Oasis improperly received payouts from the deal and that he got nothing, even though he still had a chunk of equity and an Oasis board seat.

The lawsuit was filed in February 2018 but has not previously been reported. Recently, an Illinois judge rejected a motion to dismiss the suit from the defendants, pushing the suit closer to trial. A date is set for November 18, though it is expected to be delayed, according to sources close to the defendants.

The side-pocket fund, which worked like a private-equity fund within D.E. Shaw, is one of several ways large asset managers known for their hedge funds have gotten exposure to the private markets. Funds like Two Sigma, Tiger Global, Coatue, and Point72 have built out venture-capital-like arms to evaluate investments outside the public sphere as outperforming in stocks alone has become more difficult.

Read more: A Viking Global hedge fund is helping startups turn into unicorns. Now it's hiring more people to ramp up investments.

Private investments are booming

Litigation finance, of which Oasis is a key player, is an area that alternative asset managers like hedge funds have turned to for returns. The growing niche strategy lends money to people looking to sue corporations or other individuals, and receives a portion of whatever settlement is won. Oasis had reportedly underwritten more than 100,000 lawsuits as of 2016, and lawsuits funded by third parties are expected to grow by 20% to 30% annually in the next few years, according to Vannin Capital.

Yet despite the growing popularity of private investments, these companies can be difficult to value (as shown recently through scrutiny around WeWork's value).

The lawsuit claims that before the sale to Parthenon, Raymond James bankers hired by D.E. Shaw pegged Oasis' valuation at more than $140 million — roughly double what it ended up selling for. Sources familiar with the deal also said the Chicago-based private-equity company GTCR made a preliminary bid for Oasis of $105 million to $125 million.

Chodes argues in the suit that the main parties driving the sale — D.E. Shaw and Raymond James — were motivated to get a deal done quickly, which is why the company was sold for such a discount.

The lawsuit also noted that the Raymond James bankers working the deal were also negotiating their departure from the firm to Stifel's Keefe, Bruyette, & Woods; their exit was announced roughly a month after the deal closed.

"Notwithstanding having market information and professional analyses available to them showing even better economic times in 2017 (which they considered for the good of their own companies but not for Oasis), the defendants pushed for the immediate sale of the Oasis Companies to Parthenon for an undervalued price and ignored obvious alternative options," the lawsuit said.

The lawsuit claims the D.E. Shaw Side Pocket owning the majority stake had become a "zombie fund" that held onto its assets longer than it had wanted and that the hedge fund wanted to be done with the side project.

However, the bankers working on the sale of Oasis may have initially overshot its worth, according to details in the suit. The litigation finance firm had seen its debt skyrocket since Chodes was removed as CEO in 2013, deflating its valuation.

Raymond James, D.E. Shaw, Chodes, and GTCR all declined to comment.

Many legal battles ahead

The suit is the latest in a long-running legal battle between Chodes and his former company.

There are ongoing cases alleging Chodes misappropriated trade secrets when he started his new litigation finance firm, Signal Funding. Employees who worked for Chodes at Oasis and since joined Signal have also sued Oasis over "overbroad" noncompete contracts that prevented them from working at a competitor for more than two years.

Read more: D.E. Shaw asked staff to sign a take-it-or-leave noncompete, and the deadline is weeks away. Insiders say some people could walk even after management improved the payout.

The lawsuit also states that D.E. Shaw's Side Pocket investors received $7.2 million for its equity stake in Oasis, while Chodes, who still held a chunk of equity and a board seat despite being relieved of his CEO position in 2013, did not. Chodes, the lawsuit said, was told that no equity holder was going to receive any payout because the money from the merger was going to be used to pay down Oasis' debt, which had ballooned in the years before the sale.

Yet equity holders in the Side Pocket fund still profited off the sale, according to a letter from James Witz, a lawyer representing the defendants, that is cited in the lawsuit.

"Witz indicated that Chodes' or Group's portion of the side deal transfer had 'always' been available for equity owners," the suit said. "Yet for over a year, Witz and the defendants had lied, telling Plaintiffs that there were no sale proceeds available for equity owners."

Sources close to the defendants said that the allegation that equity holders were treated differently would be challenged during the litigation and that Chodes lost his board seat when he was removed as the CEO of Oasis in 2013.

Read more: Inside D.E. Shaw's special relationship with Blackstone, which shines a light on the power the hedge fund industry's largest investors have

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• Some of the biggest losses from August came from macro hedge funds that bet big and lost on recent elections in Argentina that sent the South American country's inflation rate soaring once again. But other notable funds tripped up as well.
• BlackRock's long-running Obsidian fund and Perceptive Advisors, as well as the UK's Lansdowne Partners, posted August losses. 
• Hedge funds as a whole mostly broke even, according to Hedge Fund Research, while the S&P lost roughly 2% for the month. 
• Click here for more BI Prime stories.

For many hedge funds, August was a month where a bad bet on Argentina might have ruined your year. 

Funds like Autonomy Capital, which lost $1 billion when Argentina elected out President Mauricio Macri for the more left-leaning Alberto Fernandez, will recall August wearily.

But several other large funds that didn't make bets on the outcome of a foreign election also struggled in August. 

In the US, Joseph Edelman's well-known Perceptive Advisors Life Sciences fund, which invests in healthcare and biotech, tumbled by more than 9% while BlackRock's long-running Obsidian fund lost roughly 3% for the month. One of the UK's biggest hedge-fund managers, Lansdowne Partners, also posted a loss of 4% in its flagship Developed Markets fund.

The US equity market fell by roughly 2% in the month, while the average hedge fund roughly broke even.

Read more: From an army of traders in Long Island to quants around the world: What's coming next for hedge-fund powerhouse Schonfeld Strategic Advisors

"There were no material negative catalysts that contributed to our August performance," Jim Mannix, the chief operating officer of Perceptive, said in an email.

"The Fund's performance in August was attributed to the general volatility in the market and, to a larger degree, some of our larger positions, which had performed very well YTD through July, experienced a larger pullback than the broader market/biotech index."

Perceptive's Life Sciences fund, which manages more than $3 billion, is still up for the year, posting a return of more than 20% for 2019 even after the tough August. Some of the firm's biggest holdings — like the biotech companies Global Blood Therapeutics and Mirati Therapeutics — fell in August but have rebounded so far in September. 

The same cannot be said for Lansdowne, which declined to comment. 

Lansdowne has not made money in its flagship fund, which manages more than $5 billion, since 2017. This year, the fund is down more than 9% through the end of August. According to a Financial Times story from earlier this summer, Lansdowne has suffered from short positions not paying off. 

Read more: Humans are beating machines, and Pershing Square and Greenlight are crushing it. Here's how hedge funds performed in the first half.

"Market strength just overwhelmed negative newsflow," Peter Davies and Jonathon Regis, the managers of the fund, wrote in a letter to investors earlier this year. 

BlackRock's Obsidian fund, which invests in rates, mortgages, corporate credit, and more, fell roughly 3% in August but is still up 8.5% for the year. The fund lost money in 2018 while posting returns of roughly 7% in both 2017 and 2016, according to an investor document.

The average hedge fund, according to Hedge Fund Research, is up 7.8% in 2019 through August. 

Obsidian, which manages roughly $2 billion, is run by Stuart Spodek and BlackRock's oldest hedge-fund product. The firm declined to comment. 

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• An investor presentation from Assured Guaranty outlines the focus for Andrew Feldstein and his BlueMountain team at their new owner. 
• BlueMountain will have a bigger focus on collateralized loan obligations, and is expected to issue multiple CLOs a year in Europe and the US. Assured Guaranty will also provide capital for new hedge fund strategies to be launched.
• While Feldstein received $22.5 million in Assured shares, he is also going to invest up to $150 million in BlueMountain's funds and CLOs over the next three years. 
• Click here for more BI Prime stories. 

A day after Assured Guaranty said it would buy $19 billion hedge fund and CLO manager BlueMountain, it laid out what the future holds for the recently struggling firm and its co-founder and chief executive, Andrew Feldstein. 

There were "many companies" that were interested in acquiring or partnering with BlueMountain, Feldstein said on an earnings call for the firm's new owner on Thursday. That's even after the BlueMountain turned in an industry-lagging performance for the first half of 2019 and axed a pair of strategies that were not profitable. 

And for $160 million, Assured Guaranty was the one that ended up with Feldstein's company, buying out the partners of the firm and majority stakeholder Affiliated Managers Group. Now, an investor presentation shows just how the insurer is planning to put its new purchase to work.

CLOs, or collateralized loan obligations, already make up $12 billion of BlueMountain's $19 billion — and Feldstein expects to add $2 billion more in CLOs by next year — but Assured Guaranty's presentation makes it clear that it sees this unit as a key growth engine.

See more: BlueMountain's flagship fund is losing money so far this year even as the rest of the industry surges, and it's just the latest blow for the hedge fund

In a section of an investor presentation titled "Go-Forward Focus," it states that BlueMountain will "continue to issue multiple CLOs per year in both the US and Europe," and the affiliation with Assured Guaranty should "enhance the growth of the CLO business."

Assured and BlueMountain have had a long connection in the CLO business, Feldstein revealed on an earnings call for Assured Guaranty on Thursday morning: Assured wrapped BlueMountain's first CLO in 2005, just a couple years after Feldstein and co-founder Stephen Siderow launched the firm. 

BlueMountain has launched 34 CLOs since inception and is the 16th biggest CLO manager globally, the presentation states. 

Assured Guaranty is pumping significant money into BlueMountain's funds and CLOs, to the tune of $500 million over three years. Feldstein, who is receiving $22.5 million in Assured stock, will also invest up to $150 million in the funds.

See more: BlueMountain's head of fundamental credit is leaving the firm. Here's one of the last investments he pitched.

While CLOs seem to be the calling card, the presentation and earnings call left open the possibility of new hedge funds being launched if an opportunity is there.

"Leverage capital to support new products and other growth opportunities," reads a bullet point in the presentation on how the new asset management unit will operate. 

BlueMountain has consolidated the number of strategies it runs this year, cutting two different equities strategies because they weren't profitable enough, and the presentation names the firm's core competencies as "alternative credit, global volatility, and fixed income."

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• Some of the biggest losses from August came from macro hedge funds that bet big and lost on recent elections in Argentina that sent the South American country's inflation rate soaring once again. But other notable funds tripped up as well.
• BlackRock's long-running Obsidian fund and Perceptive Advisors, as well as the UK's Lansdowne Partners, posted August losses. 
• Hedge funds as a whole mostly broke even, according to Hedge Fund Research, while the S&P lost roughly 2% for the month. 
• Click here for more BI Prime stories.

For many hedge funds, August was a month where a bad bet on Argentina might have ruined your year. 

Funds like Autonomy Capital, which lost $1 billion when Argentina elected out President Mauricio Macri for the more left-leaning Alberto Fernandez, will recall August wearily.

But several other large funds that didn't make bets on the outcome of a foreign election also struggled in August. 

In the US, Joseph Edelman's well-known Perceptive Advisors Life Sciences fund, which invests in healthcare and biotech, tumbled by more than 9% while BlackRock's long-running Obsidian fund lost roughly 3% for the month. One of the UK's biggest hedge-fund managers, Lansdowne Partners, also posted a loss of 4% in its flagship Developed Markets fund.

The US equity market fell by roughly 2% in the month, while the average hedge fund roughly broke even.

Read more: From an army of traders in Long Island to quants around the world: What's coming next for hedge-fund powerhouse Schonfeld Strategic Advisors

"There were no material negative catalysts that contributed to our August performance," Jim Mannix, the chief operating officer of Perceptive, said in an email.

"The Fund's performance in August was attributed to the general volatility in the market and, to a larger degree, some of our larger positions, which had performed very well YTD through July, experienced a larger pullback than the broader market/biotech index."

Perceptive's Life Sciences fund, which manages more than $3 billion, is still up for the year, posting a return of more than 20% for 2019 even after the tough August. Some of the firm's biggest holdings — like the biotech companies Global Blood Therapeutics and Mirati Therapeutics — fell in August but have rebounded so far in September. 

The same cannot be said for Lansdowne, which declined to comment. 

Lansdowne has not made money in its flagship fund, which manages more than $5 billion, since 2017. This year, the fund is down more than 9% through the end of August. According to a Financial Times story from earlier this summer, Lansdowne has suffered from short positions not paying off. 

Read more: Humans are beating machines, and Pershing Square and Greenlight are crushing it. Here's how hedge funds performed in the first half.

"Market strength just overwhelmed negative newsflow," Peter Davies and Jonathon Regis, the managers of the fund, wrote in a letter to investors earlier this year. 

BlackRock's Obsidian fund, which invests in rates, mortgages, corporate credit, and more, fell roughly 3% in August but is still up 8.5% for the year. The fund lost money in 2018 while posting returns of roughly 7% in both 2017 and 2016, according to an investor document.

The average hedge fund, according to Hedge Fund Research, is up 7.8% in 2019 through August. 

Obsidian, which manages roughly $2 billion, is run by Stuart Spodek and BlackRock's oldest hedge-fund product. The firm declined to comment. 

Read more: Meet the 8 people with new ideas about data, fees, and tech who are shaking up the $3.2 trillion hedge fund game

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• Omega Advisors founder Leon Cooperman told attendees at an Alternative Investment Roundtable event in New York that now was not the time to invest in private equity.
• Cooperman, who is transitioning his hedge fund into a family office, said there were several headwinds for private equity, including an expectation for increased interest rates when many PE firms would need to sell out of their investments.
• That comes as some big hedge funds have been making more PE-like investments and the two industries battle each other for talent. 
• Click here for more BI Prime stories.

The latest move in the battle between hedge funds and private equity comes from a billionaire stock picker who represents the old guard of the hedge-fund industry.

The billionaire and Omega Advisors founder Leon Cooperman told attendees at an event in midtown Manhattan he thinks private equity, as it currently operates, is a "scam."

"They're getting very fancy fees for sitting on your money," Cooperman said at the Penn Club. PE firms have been raising massive funds and have amassed hundreds of billions of dollars in so-called dry powder that has yet to be deployed into investments.

Hedge-fund performance, meanwhile, has also been under scrutiny, thanks to the high fees that are typical of the space. Last year, the average hedge fund lost money, and the market has outpaced the average fund in 2019, according to Hedge Fund Research.

And the line between private equity and hedge funds has been getting more blurred. Some of Cooperman's hedge-fund brethren have been increasingly creeping into the private-equity space, with firms like Viking, Tiger Global, and Point72 investing in private markets and fighting PE firms for talent.

Large institutional investors, hedge funds' biggest clients, have also been pumping money into private equity, which has raised close to $432 billion in assets in 2018, with a large chunk of money that still hasn't been put to work. 

Cooperman, who made his money as a value investor in the public stock market, said he believes the market is "fully valued," making any deal expensive.

He noted that many deals being executed today have low interest rates for borrowing money — something he doesn't expect to be the case when private equity needs to sell out of their investments in seven to 10 years — and the fact the game is more crowded now. 

"It's no longer an undiscovered concept," he said. 

Read more: The booming private market has some hedge funds spreading into private equity's domain. Now a tug-of-war has broken out over talent.

According to Cooperman, who is transitioning his hedge fund into a family office, private-equity returns have been "aided and abetted" by the low-interest-rate environment that has followed the housing crisis. Without rates this low, he said, private equity returns would not be the same.

Low interest rates have "made the exit multiple much higher than the entrance multiple," he said, especially for large deals.

When a member of the audience, who said they worked at a private-equity firm, pushed back on Cooperman's outlook, he said that some smaller deals could still make sense, but the current projection for interest rates does not make large-scale deals a good bet. Many of those big deals, he said, ultimately enrich executives at the firm.

"I think leveraged buyouts to a degree are a giant case of insider trading," he said, referencing examples of public companies that then become private. 

Read more: We talked to 7 insiders about the $27 billion Refinitiv-LSE deal. Here's how one of the biggest data deals of the year came together.

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• Prominent investors like Michael Burry have been voicing concerns about passively managed index funds. Burry recently warned passive investing has become a bubble. 
• The billionaire hedge-fund founder Leon Cooperman said what "scares the hell" out of him is the lack of "stabilizers" in the market. He said the Volcker rule and rise of momentum and high-frequency traders have changed the market structure.
• "The market is not the market we grew up with," Cooperman said. 
• Click here for more BI Prime stories.

The famed investor Michael Burry recently sounded the alarm on passively managed index funds. The billionaire Leon Cooperman said he wasn't quite as negative when it comes to passive investing but warned that the market has still changed in a fundamental way. 

Passive investments now control more of the $8 trillion stock-fund market than their actively managed counterparts, and Cooperman, the founder of Omega Advisors, told attendees at an event in midtown Manhattan on Wednesday that the lack of what he called "stabilizers" in the market was concerning. 

"One of the biggest problems we are all facing now — and it scares the hell out of me — is market structure. The market structure is totally different than anything we were brought up with in the past," he said.

Read more: D.E. Shaw is going to trial over the sale of a litigation finance portfolio company, shining a light on a side-pocket deal at the secretive hedge fund firm

The Volcker rule, Cooperman said, eliminated big Wall Street banks' brokerage commissions, so now Goldman Sachs and others "won't make bids anymore." Those bids used to act as a cushion and could slow down high-frequency traders, he said. 

"There's no stabilizer left in the market," he added.

More business going to specialist exchanges outside the traditional New York Stock Exchange also adds risk, he said.

"The collapse in the stock market in the fourth quarter had nothing to do with economic fundamentals. It was a loss of liquidity in the market, hedge-fund liquidation, and tax-loss settlement," he said.

"The market is not the market we grew up with," he added. 

Read more: Mutual funds like Fidelity's famed Contrafund have slashed valuations on their WeWork stakes

Burry — who was profiled in the Michael Lewis book "The Big Short," and portrayed in its subsequent movie adaptation, for his correct bet that the housing market would crash — recently said passively managed mutual funds and exchange-traded funds are a "bubble" similar to the subprime-mortgage market in 2007.

Cooperman said he was not as extreme on his view of passive, which he said was somewhat like automation coming to the investment industry. One of the big issues with passive investing is that "a lot of people are going into the index with no idea of what they're buying," he said. 

"A bear market will occur very, very quickly" when it starts because of the amount of money tied to the relative performance of the market, he said. 

Read more: Meet the 8 people with new ideas about data, fees, and tech who are shaking up the $3.2 trillion hedge fund game

Thirty years ago, funds run by active stock pickers — who were consciously choosing which securities to invest in — had nearly eight times the assets as passively run peers.

But the long-running bull market and low fees offered by the index-fund providers Vanguard, BlackRock, Charles Schwab, and State Street, have finally pushed passive assets above active for the first time ever, according to the data company Morningstar. 

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• Millennium has added a Paris-based quant team led by the former Societe Generale prop-desk head Maxime Kahn. 
• Kahn and his team were previously running $300 million of BlueCrest Capital founder Michael Platt's money at Kahn's short-lived hedge fund 111 Capital.
• Quant talent has been hard to come by, as hedge funds have battled Silicon Valley for the best people.
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Izzy Englander's Millennium has added a team of quants in Paris that were running hundreds of millions of Michael Platt's money, sources told Business Insider.

Maxime Kahn and his team of quants joined Englander's fund roughly two years after he started 111 Capital.

Kahn, the former head of the prop desk at Societe Generale, was given $300 million by the BlueCrest Capital founder and billionaire Platt in 2017 to start 111 Capital after more than 21 years at the French bank. Kahn's firm was allowed to run Platt's money for only the first 18 months, according to media reports at the time.

Millennium declined to comment, while Kahn and Platt could not be reached for comment. 

Millennium, which notched returns of 5.61% through the end of July, has in the past couple years added big names, like Hutchin Hill founder Neil Chriss and the former Nomura and Barclays quant trader Derrick Li, to its quant roster.

Read more: Balyasny's quant head is out as the $6 billion hedge fund undergoes a strategy revamp

Quants have been some of the most sought-after talent in the hedge fund game, with managers battling not just one another but big-name Silicon Valley companies for talent.

The decision for Kahn and his team to join a larger fund is discouraging news for hopeful hedge fund founders, who have found the appetite for new launches lacking.

Other small funds, like Samantha Greenberg's Margate Capital and Mark Fishman's Aesir Capital, have decided to close shop and join bigger managers — Citadel for Greenberg and ExodusPoint for Fishman — this year instead of operating without the scale and resources Millennium, Citadel, Exodus, and others can offer.

Read more: From an army of traders in Long Island to quants around the world: What's coming next for hedge-fund powerhouse Schonfeld Strategic Advisors

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• Institutional investors are cautious about risks to the global economy and are simultaneously reluctant to make any major contrarian bets in the stock market.
• Their uncertainty stems largely from the trade war and has left them feeling trapped, according to money managers who spoke to Business Insider. 
• Hedge funds' exposure to stocks is near its lowest level since the financial crisis and investor sentiment is weak, data compiled by JPMorgan show.  
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Warren Buffett is credited with saying"be fearful when others are greedy, and greedy when others are fearful."

These words of wisdom helped the Berkshire Hathaway chairman earn his stripes as the most legendary investor of his generation.  

But these days, institutional investors in stocks are struggling to apply his principle. They are confronted with an investing landscape that contains sufficient risks to be fearful of, but lacks the bullish pointers that would warrant a contrarian posture. 

"Institutional investors are cautious but they kind of feel like they're stuck," said Lori Heinel, the deputy chief investment officer of State Street Global Advisors, which manages nearly $2.9 trillion in assets. 

"They can't just get out of equities because they need the returns," she told Business Insider during a recent interview. "They're afraid of missing out because this market has been so choppy and surprisingly resilient. But they're also looking at hedges, buffers, and other ways to truncate some of the tail risk."

These comments check out when one looks at the data on large investors' holdings.

In a recent note to clients, Marko Kolanovic, JPMorgan's global head of macro quant and derivative strategy, shared the following two charts to show that investors' views on stocks have become strained. 

First, hedge funds' exposure to equities is near its lowest level since the financial crisis.

In addition, investor sentiment as measured by the AAII bull-bear indicator has deteriorated to levels seen during the 2008 financial crisis and the market meltdowns in 2015 and 2018.

"As the US-China trade war destabilizes the global economy and Trump's tweets continue destabilizing financial markets, many managers find it difficult to be invested in equity markets," Kolanovic said. 

He added, "The uncertainty brought about by the trade war has erased confidence built over a decade in the equity markets, in our view, both with more sophisticated investors (hedge funds) and individual investors alike."

Read more: GOLDMAN SACHS: The stampede out of stock-market favorites is a preview of more extreme moves to come. Here's how to single out the ultimate winners.

The bottom line is that many investors aren't seizing this deadlock as a contrarian buying opportunity.

This might be such an occassion, according to Michael Hartnett, the chief investment strategist at Bank of America Merrill Lynch. He said in a recent note that the firm's bull and bear indicator flashed a contrarian "buy" signal for the first time since January. 

But his observation came with a warning on what the flipside could look like. Investors' recession fears triggered an exodus from stocks and a record $160 billion flow into bond funds that inflated the asset class. A disorderly exit from bonds could trigger a spike in interest rates and, consequently, a recession, according to Hartnett. 

The 'most complex' time to invest

He laid out one specific scenario of how the downside risks may unfold across markets. Meanwhile, investors have their eyes on a broader factor at play: this business cycle appears to be in its twilight period. 

"The late cycle is the most complex and challenging period of the market cycle and of the economic cycle," said Erik Knutzen, the multi-asset-class chief investment officer at Neuberger Berman, a $333 billion manager.

"That's what investors are reacting to," he told Business Insider. "I think they are, quite potentially, paralyzed at this point."

Knutzen's advice for responding to this predicament is to consider parts of the world with economic cycles that aren't as mature as the US', and nascent themes like 5G technology and autonomous driving.

The Vanguard FTSE Emerging Market exchange-traded fund, the iShares Self-Driving EV and Tech ETF, and the Defiance Next Gen Connectivity ETF are three ways to invest in these recommendations. 

SEE ALSO: GOLDMAN SACHS: The stampede out of stock-market favorites is a preview of more extreme moves to come. Here's how to single out the ultimate winners. Akin Oyedele 2h

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• A massive shift in the stock market from top-performing growth stocks to lower performing names triggered a sharp shift in "momentum," and is crushing hedge funds this week. 
• "This has been a brutal move," said a person at a hedge fund in London. "Huge move and lots of pain. It was like a 4 standard deviation day followed by another 4 standard deviation day. That's unheard of."
• "The level of crowding remains high, portfolios are fragile right now, and should there be a fundamental shock, this unwind could persist for multiple months," a Morgan Stanley memo to clients said.
• Click here for more BI Prime stories.

A massive shift in the stock market from top-performing growth stocks to lower performing names triggered a sharp shift in "momentum," and is crushing hedge funds this week. 

Goldman Sachs said in a note that the decline "ranks among the sharpest on record," and Morgan Stanley sent a memo to hedge-fund clients, seen by Business Insider, trying to explain the moves and saying the pain could well keep going. 

"Everything that worked all year got sacked and whacked," one quant hedge fund source told Business Insider.

"This has been a brutal move," said another person at a hedge fund in London. "Huge move and lots of pain. It was like a 4 standard deviation day followed by another 4 standard deviation day. That's unheard of."

A Morgan Stanley sales desk sent a memo on Wednesday, outlining its traders' take on "the magnitude and velocity of this week's rotation."

Read more: The stock market is experiencing a jarring shift seen only twice in history, and not since the tech bubble. Here's where JPMorgan's quant guru says investors should look to capitalize.

"All strategies are down," Morgan Stanley said, warning that if the momentum "morphs" from short sellers covering to a wider selloff by longer term stock holders, "this is likely to spill over to the overall market." 

"If contained to a positioning unwind, the pressure should abate in a week or two," the bank said. "But to be clear, the risks skew towards more derisking relative to historical unwinds, not less. The level of crowding remains high, portfolios are fragile right now, and should there be a fundamental shock, this unwind could persist for multiple months."

"The longs are in the largest sectors of the market," including tech and healthcare, "and underperformance there can bring a broader array of sellers." 

What caused this big shift? 

"There was no single hard catalyst," Morgan Stanley said. "The proximate causes were modest improvements in macro data" such as ADP's US payrolls data, non-manufacturing activity, and the Citi Economic Surprise Index, as well as increased optimism about the US-China trade war and recent upticks in the 10-year Treasury yield.

"But it was really heightened risk aversion that caused the moves — investors were becoming increasingly nervous about P/L after underperformance from crowded areas," such as software stocks as well as what it said was the underperformance of short sellers in the week after Labor Day. "A lot of investors trying to protect P/L and de-risk at the same time led to gaps that then accelerated and fed on themselves."

Read More: GOLDMAN SACHS: The stampede out of stock-market favorites is a preview of more extreme moves to come. Here's how to single out the ultimate winners.

The event brought up bad memories of the "quant quake" of 2007, driven by crowded trades that ended up thrashing giants like Renaissance Technologies. But the quant hedge fund source said that losses this time around were "not close to" those during the quake a decade ago. 

Still, the memo detailed some scenarios that could exacerbate the problem.

Morgan Stanley said selling among long investors could happen if:  

• • "There is a decline in P/L that forces further degrossing (i.e. this just gets worse to the point hedge funds need to sell longs).
  • There is a negative fundamental shock, investors realize that their longs in Growth and Tech are more cyclical than they expected, and they are forced to sell those holdings."

Also ominous: Morgan Stanley's CFO, at a Barclays conference on Wednesday, said that equities trading has been slow in the third quarter. The firm had originally said the third quarter was looking strong on trading. 

A Morgan Stanley spokesman said the bank couldn't immediately comment on the memo. 

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• You might have missed it, but there's been some remarkable shifts in the stock market over the past few days.
• In particular, there's been a shift from momentum stocks, or those that have had the wind behind their backs, to value stocks, or those stocks that had been ignored and are considered cheaper. 
• A number of hedge funds had bet big on momentum, and the shift has left many nursing significant losses, according to sources.
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To casual observers, the stock market has traded in a relatively benign fashion over the past few days.

But some remarkable shifts that took place underneath the surface caught the attention of strategists, and are inflicting severe pain on a number of hedge funds. 

In short, there's been a massive rotation away from the best-performing stocks and into those that had been neglected. That is known as a rotation from momentum stocks, or those that have had the wind behind their backs, to value stocks, or those stocks that had been ignored and are considered cheaper. 

Goldman Sachs said in a note that the decline on momentum "ranks among the sharpest on record," and Morgan Stanley sent a memo to hedge-fund clients, seen by Business Insider, trying to explain the moves and saying the pain could well keep going.

Here's what you need to know:

• The sudden and decisive rotation exposes how vulnerable investors have become to swings of this nature, according to Peter Oppenheimer, the chief global equity strategy at Goldman Sachs. In a recent note to clients, he said the rotation would most likely be short-lived and explained how to align with the longer-term winners. 
• Marko Kolanovic, JPMorgan's global head of macro quant and derivative strategy, identified a pattern within the shift that has happened only twice before. Specifically, last week JPMorgan's momentum indicator of small-cap stocks reached its maximal negative reading, while the same indicator for large companies on the S&P 500 reached its maximal positive reading. A divergence of this magnitude has occurred only twice before, according to Kolanovic: in February 1999 and during the tech bubble. He said the move into value stocks was likely to continue and advised investors on how to be positioned so they can capture the strongest upside going forward.
• Hedge funds have been feeling pain as a result of the shift. "Everything that worked all year got sacked and whacked," one quant hedge fund source told Business Insider. "This has been a brutal move," said another person at a hedge fund in London. "Huge move and lots of pain. It was like a 4 standard deviation day followed by another 4 standard deviation day. That's unheard of."
• A Morgan Stanley sales desk sent a memo on Wednesday, outlining its traders' take on "the magnitude and velocity of this week's rotation." The note said that "all strategies are down," and warned that if the momentum "morphs" from short sellers covering to a wider selloff by longer term stock holders, "this is likely to spill over to the overall market."

Join the conversation about this story »

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