Kyle Bass’ Heyman Advisors had a very poor quarter that was characterized by its selloff of General Motors Company (NYSE:GM), a company in which Bass had previously declared bullish sentiment towards. Bass’ five reported long positions in companies with market-caps of at least $1 billion lost 18.9% during the first quarter according to our metric of weighted average returns based on the equity portfolio of the fund at the start of quarter in question. That performance landed Bass the dubious distinction of being the worst performing fund in our database of nearly 700 actively reporting funds during the first quarter, and also dropped his one-year returns to -37.3%. Note however that Bass’ actual returns may be slightly or even significantly different, as his equity positions may only be a small part of his overall portfolio.
General Motors Company (NYSE:GM) was one of those five positions, though it was slashed dramatically during the fourth quarter, by 98% to just under 126,000 shares valued at $4.40 million as Bass seemingly gave up on the auto maker. That came as a surprise given that Bass had opened his large position in GM just over one year ago, during the fourth quarter of 2013 and declared shortly afterwards that the stock was undervalued and could hit $50 over the next 12 to 18 months. Fast forward to the fourth quarter of 2014 and Bass ended up selling off most of his position at a loss from what he purchased it for one year prior. The selloff had to sting even more after shares of General Motors Company (NYSE:GM) appreciated by more than 10% during the first two months of 2015, eventually finishing the first quarter of the year up by 8.29%. While hanging onto his GM shares would not have saved Bass from a poor quarter, it may have been enough to spare him from being the worst performing fund in our database.
So where did it all go wrong for Bass? It begins with his top position in Nationstar Mortgage Holdings Inc (NYSE:NSM). His 3.39 million shares of Nationstar Mortgage Holdings Inc (NYSE:NSM),valued at $95.53 million were a decrease of 19% from the previous quarter, but that was little consolation as the company’s shares dipped by over 12% during the quarter. Nationstar Mortgage Holdings Inc (NYSE:NSM) shares were actually up by over 10% in late March until it announced a public offering of an additional 17.5 million shares and entered into agreements with Ocwen Financial Corp (NYSE:OCN) to purchase $60 billion of mortgage servicing rights. Shares tanked over 20% in the following week. That was also bad news for Michael Novogratz of Fortress Investment Group, who had the second greatest exposure to the stock after Bass.
Speaking of Ocwen Financial Corp (NYSE:OCN), it was an even bigger loser during the quarter and Bass also had a large position in it, his third largest, consisting of 3.26 million shares valued at $49.28 million. Ocwen Financial Corp (NYSE:OCN) crumbled by more than 45% during the quarter, not on the aforementioned deal, but over concerns that the company could be suspended from doing business in California as it faces the wrath of regulators there for not providing them with information that proves the mortgage services of the company were complying with state laws. Other investors believe the stock is a great buy now however, one that will make up all of its lost ground once the regulatory fervor subsides. Bass also has the largest exposure to Ocwen, followed by Noah Levy and Eugene Dozortsev’s Newtyn Management.
A new position in Occidental Petroleum Corporation (NYSE:OXY) was another miss for Bass, with shares of that company dipping by 8.59% during the first quarter. The new position consisted of an even 25,000 shares of Occidental Petroleum Corporation (NYSE:OXY) valued at $2.02 million. While losses in the energy sector have slowed from the second half of last year, they have yet to have the expected bounce back that many investors seemed to be counting on entering the quarter, including Bass apparently. Andrew Hall’s Astenbeck Capital Management was also counting on a bounce back, opening a large new position in Occidental Petroleum Corporation (NYSE:OXY) during the fourth quarter.
Bass also had a position of 2.27 million shares underlying put options in SYSCO Corporation (NYSE:SYY), a food services company. The position had a value of $89.98 million. With SYSCO Corporation (NYSE:SYY)’s returns being down by 4.19% during the first quarter, there’s potential some or all of those options have been, or will be able to be, exercised. Donald Yacktman of Yacktman Asset Management is hoping for a big turnaround in the second quarter, as he holds a long position in SYSCO Corporation (NYSE:SYY) of 31.63 million shares.
As we’ve seen, hedge funds and other big money managers like Bass prefer to have the largest amounts of their capital invested in large and mega-cap stocks because these companies allow a much larger capital allocation, which is important taking into account that the global hedge fund industry has swollen to nearly $3.0 trillion. That’s why, if we take a look at the most popular stocks among hedge funds (we track more than 700 in our database), we won’t find any mid- or small-cap stocks there. However, our backtests of hedge funds’ equity portfolios between 1999 and 2012 revealed that the 50 most popular stocks among hedge funds underperformed the market by 7 basis points per month. However, we found that we can combine the pricing inefficiencies among small-cap picks with hedge fund expertise and obtain significant results. This was confirmed through backtesting and in forward tests of our small-cap strategy since 2012. The strategy, which involves imitating the 15 most popular small-cap picks among hedge funds managed to provide gains of more than 132%, beating the broader market by over 79 percentage points (see the details).
Disclosure: None
