Here's What Hedge Funds Have Been Saying About COVID-19

We're starting to get second-quarter investor letters from hedge funds, and as would be expected, COVID-19 features prominently in them. One fund manager pointed out that despite the recession caused by COVID-19, the bulls are running in the market. 

Other fund managers have highlighted the opportunities presented by share price dislocation due to the coronavirus. At least one fund manager firmly believes the concerns around COVID-19 are overdone despite the running of the bulls in the market. 

Bull Market Coincides With Recession

Jacobs Asset Management Managing Partner Sy Jacobs said in his second-quarter letter to investors that it's strange how the bull market has continued despite the recession triggered by COVID-19. He said a short list of story, momentum and growth stocks has been leading the bull market. 

He was surprised that value investing has continued to underperform during a recession because historically, it has outperformed during economic downturns. However, this time around, the market has benefitted from an extended period of zero interest rate policy, quantitative easing, stimulus and the shift toward index investing, all of which have extended the bull market despite the fact that a recession is going on.

Opportunities From COVID-19

A key theme for hedge fund managers has been how COVID-19 has created dislocations in the market, enabling them to find opportunities on both the long and short sides. Fund managers have focused on betting against companies that have been damaged by the pandemic and investing in companies that have benefitted from it.

Acacia Capital Partners' Peter Kinney said in his second-quarter letter that the fund is holding more cash because buying things at a discount right now isn't working. He said the fund will invest more when prices improve, increasing the odds of being able to buy stocks at a sufficient discount to fundamental valuation. 

COVID-19 Concerns Overdone

David Capital Partners published a lengthy discussion of COVID-19 in one of their recent letters. The fund takes a contrarian view on the virus, arguing that concerns about it are overdone. Fund management accused mainstream news outlets of resorting to "the Yellow Journalism of a century ago, printing hyperbolic and misleading headlines in search of clicks and eyeballs." 

Based on their analysis of the situation, they are optimistic that the economy and asset prices are set for a strong recovery. They believe the spread of COVID-19 has peaked and is now in a steady decline. Further, they believe governments and central banks will "err on the side of doing 'too much' rather than 'too little'" in their stimulus efforts. 

It's widely believed that in order for things to return to normal, a vaccine or herd immunity is required. However, David Capital management argued that what we have seen is the breakpoint of the disease, which is the level of resistance in a population at which the spread of the disease collapses. They said the breakpoint of any disease is about one-third or less the threshold required for herd immunity.

While the David Capital view of COVID-19 is extremely optimistic, they are in the minority. Most fund managers expect the market difficulties to continue for a while.