The love affair between hedge funds and media stocks is being tested.
Dragged down by concerns their revenue is at risk, cable television and movie stocks tracked by the 15-company Standard & Poor’s 500 Media Index tumbled 8.2 percent in two days, the biggest slump since 2008. The drop erased 2015’s gains for a group that has been a gold mine for professional investors, posting annualized returns of more than 33 percent since 2009.
Hedge funds have been near-constant champions of the industry, drawn in by its high cash generation and buybacks, takeover speculation and the straight-up momentum of the stocks themselves. This week’s retreat represents the sharpest rebuke to that thesis -- and one of its only setbacks in a bull market well into its seventh year.
“A lot of these funds are speculating on deals, they’re investors playing the spread and not fundamentals,” said Alpha Theory Advisors president Benjamin Dunn, who acts as adviser to hedge funds with about $6 billion in assets. “A few of these names are down big today and you got some pile-on effect with the smaller ones as well.”
Hedge funds own an average 9.7 percent of the 15 companies in the gauge, according to data compiled by Bloomberg. That’s a bigger stake than in any of the other 23 industry groups within the S&P 500. The positions largely reflect merger speculation, said Dunn, who is based in Crested Butte, Colorado.
Rally Rulers
More than technology or even biotech, media stocks have ruled the rally that restored $17 trillion to American equity prices since the financial crisis. Companies from CBS Corp. to Tegna Inc. and Time Warner Cable Inc. are among stocks with the 60 biggest increases during the stretch.
More than $110 billion in media takeovers have been announced in the past year, including Charter Communications Inc.’s pending $79 billion purchase of Time Warner Cable Inc. In the same period, media companies in the index repurchased an average $2.22 billion of their own shares, more than any other industry in the S&P 500 apart from technology.
“People are buying other names in the space hoping valuations will increase for competitors and peers,” Scott Houlihan, a merger-arbitrage research analyst at Purchase, New York-based OTA Limited Partnership, said by phone. “Then again, you get a day like this where the whole sector gets devalued, and if you’re not hedged somehow you get punished.”
Major Holders