The recent fateful Volkswagen short shows how risky it can be to follow the herd. But why do so many hedge funds own stock in the same companies?
By Britt Erica Tunick
When Porsche's attempted takeover of Volkswagen sent VW shares soaring in October, hedge funds that had been shorting the stock took one of their biggest hits of the year. Not simply a bad trade, it was another harsh reminder of the downside risk when multiple hedge fund managers pile into the same names.
For years, the tendency of hedge funds to flock to the same trades was closely watched by investors looking to hang onto the coattails of savvy managers. But now stocks most heavily owned by hedge funds have been tanking, and some investors have begun using hedge funds' choices as contrarian indicators.
The shift began in the summer of 2007, when quantitative hedge funds that crowded...