Petroleo Brasileiro Petrobras SA (ADR) (PBR) Falls on Settlement Report While Hedge Funds Maintain Bearish Sentiment

The stock of Petroleo Brasileiro Petrobras SA (ADR) (NYSE:PBR) declined by around 2% on Tuesday amid a Reuters report that the company might end up paying $1.6 billion to the U.S. authorities for its criminal and civil probes and that the settlement process is likely to go on for the next two or three years. The authorities are still conducting investigations in all the criminal allegations filed against the Brazilian company. If these penalties are confirmed, this would be the largest corporate corruption fine with the U.S. Department of Justice after Siemens AG, which was charged $800 million on bribery allegations.

According to the Brazilian authorities cited by Reuters, there wasn’t any evidence of payments being made to the government officials from Petroleo Brasileiro Petrobras SA (ADR) (NYSE:PBR)’s accounts. However, if the company comes clean out of the bribery scandal, it could still be charged for not maintaining accurate financial records and upholding a feeble internal accounting system.


Petroleo Brasileiro Petrobras SA (ADR) (NYSE:PBR) came under the federal scanner after it was accused of colluding with construction companies to push the price of contracts higher. The scandal involved several local politicians and key executives of the company, who were accused of receiving financial benefits.

The stock Petroleo Brasileiro Petrobras SA (ADR) (NYSE:PBR) has lost 21.25% year-to-date and over 66% in the last year. According to our data, the number of hedge funds with long positions in the company fell by four during the second quarter and 31 investors reported ownership of $760.56 million worth of stock as of the end of June. Moreover, overall, smart money are not fond of the company, as they held around 1.2% of the outstanding stock at the end of June.

A quick word on why we track hedge fund activity. In 2014, equity hedge funds returned just 1.4%. In 2013, that figure was 11.3%, and in 2012, they returned just 4.8%. These are embarrassingly low figures compared to the S&P 500 ETF (SPY)’s 13.5% gain in 2014, 32.3% gain in 2013, and 16% gain in 2012. Does this mean that hedge fund managers are dumber than a bucket of rocks when it comes to picking stocks? The answer is definitely no. Our small-cap hedge fund strategy, which identifies the best small-cap stock picks of the best hedge fund managers returned 28.2% in 2014, 53.2% in 2013, and 33.3% in 2012, outperforming the market each year (it’s outperforming it so far in 2015 too). What’s the reason for this discrepancy you may ask? The reason is simple: size. Hedge funds have gotten so large, they have to allocate the majority of their money into large-cap liquid stocks that are more efficiently priced. This is where we come in. Our research has shown that it is actually hedge funds’ small-cap picks that are their best performing ones and we have consistently identified the best picks of the best managers, returning 135% since the launch of our small-cap strategy compared to less than 60% for the S&P 500 (see the details).

Fisher Asset Management, led by Ken Fisher, was the largest shareholder of Petroleo Brasileiro Petrobras SA (ADR) (NYSE:PBR) in our database. His position in the energy company at the end of the second quarter amounted to 8.54 million shares valued at $77.25 million. Howard Marks’ Oaktree Capital Management is another shareholder with 7.56 million shares valued at $68.40 million. On the other hand, Rob Citrone’s Discovery Capital Management closed its stake in the company by unloading 14.38 million shares, while Orlando Muyshondt’s Tyrian Investments disposed of its entire position of 2.26 million shares.

Disclosure: None