Australia’s most prominent hedge funds are experiencing substantial windfalls as some of the sharemarket’s largest stocks suffer significant declines. These funds contend that passive investment has inflated a market bubble now beginning to burst. Regal Partners, led by Phil King, has been a major beneficiary, particularly through its short positions against Commonwealth Bank and Cochlear.
Cochlear, a developer of advanced hearing devices, plummeted almost 41 per cent last month after a surprising earnings downgrade. Mr King noted Cochlear was “extremely overvalued” without growth. Commonwealth Bank, the nation’s largest lender, also experienced its biggest single-day drop recently, triggered by a disappointing earnings update and concerns over proposed tax concession changes. These short positions, where investors profit from share price declines, significantly boosted Regal’s hedge fund performance.
This increased volatility among major equities is now common due to evolving market structures, including high-frequency trading and passive investment. Other significant Australian hedge funds are also capitalising. Ten Cap, managed by Jun Bei Liu, has benefited from short positions in companies like blood plasma giant CSL and retail conglomerate Wesfarmers. Plato Investment Management’s David Allen similarly targets overvalued blue chips, including REA Group, WiseTech Global, and James Hardie Industries, believing “sanity is returning to the market.”
Fund managers highlight that while many assume blue-chip downgrades are priced in, this is often not the case, leading to sharp share price volatility. Morningstar strategist Lochlan Halloway noted a “messy confession season” was anticipated given global economic pressures. This trend suggests prominent stocks, after years of inflated valuations, are being reassessed based on fundamentals, offering continued opportunities for short-sellers.
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