Equities analysts have been warning since the covid-19 pandemic asset price rally that U.S. markets are a speculative bubble at risk of bursting and causing serious economic pain for investors and hedge fund managers.
A bubble occurs when asset prices increase in a short period to unprecedented levels, driven by demand that results in a price surge often uncorrelated with the asset’s fundamentals. Eventually, some event triggers the bubble to burst, rendering the asset held by investors worthless.
Hedge fund managers are struggling to catch a falling knife as U.S. assets plummet amid a higher-than-expected inflation rate, tightening Federal Reserve policies and an escalating war in Ukraine.
Stocks, crypto, and real estate are all struggling as the Federal Reserve tightens its monetary stance by hiking interest rates to tame inflation on the one hand, and sacrificing economic growth on the other.
The S&P 500 index has lost 18.66 percent so far this year, with a recent seven-straight-week slide pushing the index into a bear market. At one point, the S&P was down more than 20 percent from its intraday record high in January — its worst rout since 1987.
Some household-name stocks have been pummelled, suggesting they were overvalued. For example, Facebook (Meta) is down 42.83 percent and Walmart is down 17.59 percent year-to-date.
A crypto and tech stock price crash this month is being compared to both the bust of the dot-com bubble in 2000 and the Global Financial Crisis of 2008, according to a new report by Bank of America Research.
In the wake of all this asset value carnage, investors are counting losses and some fund managers’ losses amount to billions of dollars.
Here are five hedge fund managers who got smoked by the speculative bubble pop:
Tiger Global, one of the world’s biggest hedge funds and a big investor in high-growth, speculative companies, saw its shares tumble since their pandemic peaks. The company, founded by billionaire hedge fund manager Chase Coleman, is nursing a $17 billion hit to its portfolio caused by a sell-off in tech stocks. It’s one of the biggest dollar declines for a hedge fund in history, according to a Financial Times report.
SoftBank’s portfolio has been hit by China’s crackdown on the tech sector and the prospect of the U.S. Federal Reserve further raising interest rates, FT reported. A historic $27 billion loss on SoftBank’s Vision Fund plunged the conglomerate as a whole into its biggest-ever quarterly net loss of $13 billion, and sent its shares down to a two-month low. The company is run by Korean-Japanese billionaire tech entrepreneur, investor and philanthropist Masayoshi Son.
Mike Novogratz-led firm Galaxy Digital, a cryptocurrency-focused financial services provider, said it expected its quarter-to-date loss to come in at $300 million. The announcement came on the back of the collapse in the value of algorithmic stablecoin TerraUSD (UST) and its sister token LUNA, which are at the center of the collapse in the crypto asset market this monthy. Galaxy, however, clarified that its treasury does not utilize algorithmic stablecoins.
Melvin Capital, once one of Wall Street’s most successful hedge funds, lost billions in the GameStop short-squeeze saga. Now it’s shutting down its doors and plans to return all its investors their capital investments. The embattled hedge fund, run by its once high-flying founder Gabe Plotkin, posted a 21 percent loss in the first quarter of this year. It is now asking investors to move to a new fund run by Plotkin that will be opening its doors on July 1.
Archegos Capital Management founder Bill Hwang was charged in a multibillion-dollar crime case that left investors holding losses amounting to more than $10 billion. The hedge fund took extraordinary risks by leveraging stock positions and artificially inflating prices. This practice left the company exposed when it ran out of money a year ago, a prosecutor told the Manhattan federal court on April 27.
Hwang made huge risky investments using a derivative known as a total return swap, in which banks promised Archegos a return based on the performance of a handful of stocks. The risks did not pay off when market fortunes turned and the firm was left in a precarious free cash flow position, according to a Reuters report.
Photos: Mike Novogratz, CEO of Galaxy Investment Partners, Sept. 20, 2018. (Photo by Evan Agostini/Invision/AP) / Chase Coleman, founder of Tiger Global (Bloomberg/Getty) / Bill Hwang, founder of Archegos Capital Management, April 27, 2022. (AP Photo/Seth Wenig) / Masayoshi Son, president of Softbank Oct. 15, 2012 (AP Photo/Koji Sasahara)