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WWD : Report Finds E-commerce Draws Hedge Funds

Hedge funds are the new e-commerce investors.

A report from Nasdaq OMX by retail analyst Calvin Silver and technology analyst Michael Stiller called “Is E-Commerce the Growth Story It’s Widely Believed to Be?” views the e-commerce play as a story about disruption.

The conclusion is contrary to the initial thought that e-commerce would attract traditional growth investors.

Silver explained that the presumption of interest from growth investors was initially based on public company reports in the softlines sector in which executives spoke about “double-digit growth in the e-commerce channel versus overall revenue. There was a clear disparity there, with the notion that the e-commerce channel was going to be where future growth for the industry lay.”

He added that consumer spending data over the last 10 years showed that spending on apparel and footwear completely underperformed in comparison to general consumer spending patterns. “We wanted to find out whether or not the market was growing and whether [these companies] were reaching new clients. A lot of times the information was vague about what double-digit [growth] actually meant,” Silver said.

Stiller explained that what they found when analyzing the data was that the disruption was coming from the perspective of wallet share. “Where are you getting your sales from? Consumers can go into stores or go online. Retailers were stealing share from each other online,” rather than generally growing their overall businesses, he said.

As consumer shopping behavior began indicating a preference for free shipping or faster shipping methods, companies also saw margins erode. Conversion of online shopping carts to actual purchases also initiated some deleveraging of fixed assets, such as the need for fewer brick-and-mortar stores. More importantly, companies now have to figure out how to best integrate the physical presence with the online channel, as well as how to allocate a purchase when consumers go to a store to see a product but choose to buy online, the analysts said.

They found that companies that are either e-commerce pure plays or brick-and-mortar with an e-commerce component saw an increase in hedge fund concentration of 175 percent and 95 percent, respectively. Hedge fund ownership of firms lacking an e-commerce play was down 17 percent.

According to Stiller, there’s no incentive for the growth investor, who is looking for a longer-term investment with a typical three- to five-year time horizon, when “retailers are fighting for the same market share and are picking off from each other.”

In contrast, hedge funds can play the disruption angle because they’re looking for unique trading opportunities that they can move in and out of fairly quickly, Silver said. E-commerce plays into that tactic, he said, either because they can short a loser or make a bet based on a perceived opportunity for a pop in the stock price.

And while companies with an e-commerce or omnichannel strategy on average saw their share price appreciate 63 percent from 2010 to 2014, those that underperformed also open themselves up to activist attention and elevated short interest from hedge funds that may short the stock, the report said.