Hedge Funds Binged on GE Shares Before Worst Rout in 11 Years

(Bloomberg) -- General Electric Co.’s biggest plunge in 11 years came at an awkward time for some of Wall Street’s savviest investors, after a recent buying spree by the likes of Renaissance Technologies, Citadel Advisors and Adage Capital Management.

Hedge funds added more shares of GE than any other company to their industrial investments in the second quarter, according to an initial analysis of U.S. regulatory filings compiled by Bloomberg Global Data. Their holdings increased by 25% to a total of 199.3 million shares, valued at $2.09 billion at the quarter’s end.

While some recent buyers may have sold since then, many of them were probably left holding the bag when Harry Markopolos, who rose to prominence by blowing the whistle on Bernie Madoff, on Thursday accused GE of “accounting fraud.” Markopolos’s report wiped out much of the company’s share gains this year. Chief Executive Officer Larry Culp labeled the analysis “market manipulation -- pure and simple.”

While a Friday advance softened the blow, the rout highlights the perils in trying to call a bottom as a company attempts a turnaround from an epic collapse. GE’s market value fell by more than $200 billion in the two years ended Dec. 31 amid weak cash flow, a slump in its power division and two CEO changes. While Culp vowed to improve financial transparency after taking over in October, Markopolos accused GE of masking tens of billions in liabilities.

The shares surged 9.7% to $8.79 at the close in New York, the most in six months, with some analysts expressing skepticism over Markopolos’s report. But that didn’t make up for all of GE’s 11% plunge on Thursday, the sharpest one-day drop in 11 years.

It’s impossible to know which hedge funds may have sold some or all of their GE holdings before Thursday’s rout, and the firms typically don’t discuss their holdings.

Buyers, Sellers

Renaissance added 38.3 million GE shares in the second quarter, more than doubling its holdings in the company, according to data compiled by Bloomberg. Renaissance is a quantitative fund that makes investing decisions based on mathematical and statistical methods, a representative said, declining to provide additional comment.

Citadel’s hedge fund bought about 4.5 million shares during the period, increasing its stake more than sixfold, according to regulatory filings.

Adage, which declined to comment, took a new position of 7.24 million GE shares.

Not all hedge funds were buyers in the second quarter. Steadfast Capital Management dumped almost all of the 15.3 million GE shares it held as of March 31. The firm didn’t immediately respond to a request for comment. Tocqueville Asset Management, which declined to comment, pared its holdings 37% to 1.7 million shares.

This week, prominent buyers swooped in amid the selloff. Hedge fund billionaire Stanley Druckenmiller said he picked up GE shares on Thursday. The implication that Culp and the new management team are engaged in intentional fraud is “outrageous,” he said by email.

Culp himself purchased about $2 million in shares Thursday, Boston-based GE said. That followed a $3 million stock purchase earlier this week, which the company called a reflection of “confidence in GE’s long-term strengths and its progress.”

‘Impending Losses’

Markopolos, who is working with a short seller, said GE will need to increase its insurance reserves for a long-term care portfolio immediately by $18.5 billion in cash -- plus an additional noncash charge of $10.5 billion when new accounting rules take effect. GE also is hiding a loss of more than $9 billion on its holdings in oilfield-services company Baker Hughes, he said.

“These impending losses will destroy GE’s balance sheet, debt ratios and likely also violate debt covenants,” Markopolos said in his report.

GE defended its accounting in a statement by Culp and board member Leslie Seidman, who chairs the audit committee.

“The fact that he wrote a 170-page paper but never talked to company officials goes to show that he is not interested in accurate financial analysis, but solely in generating downward volatility in GE stock so that he and his undisclosed hedge fund partner can personally profit,” Culp said of Markopolos.

Seidman said the analysis included “novel interpretations and downright mistakes” about accounting requirements.

Hedge-Fund Holdings

For the analysis of hedge-fund investments, Bloomberg looked at 824 filings for the second quarter, which showed $1.66 trillion in total stock holdings. Industrial-sector investments accounted for $120.5 billion, or 7.2% of the value of the securities listed in the filings. The firms cut their holdings the most in railroad CSX Corp., which has fallen 17% since the end of the period.

Several analysts, while cautious about GE’s outlook, defended the company.

“Our initial reaction is that we believe that there are sufficient shortcomings in the short report’s assertions and we continue to believe in CEO Larry Culp’s ability to improve the company over time,” Citigroup analyst Andrew Kaplowitz wrote in a note to investors.

--With assistance from Esha Dey.

To contact the reporters on this story: Jack Pitcher in New York at jpitcher2@bloomberg.net;Brendan Case in Dallas at bcase4@bloomberg.net

To contact the editors responsible for this story: Brendan Case at bcase4@bloomberg.net, Kara Wetzel, John Lauerman

©2019 Bloomberg L.P.