Is it only the rich who get hurt when hedge funds lose money, or should regular investors pay attention?
That's a question that has come up after some technology-focused hedge funds suffered unusually large losses in March. Coatue Management, for instance, lost 9 percent in its main fund during the month, as did JAT Capital Management. Both funds had previously had strong returns.
On the face of it, hedge fund employees and investors feel most of the impact. And of course, some of the stocks those funds held like Amazon and Facebook are popular among retail investors, who would have been hurt in March if they also owned them.
But Coatue's April 4 investor letter points to another issue: If hedge funds lose a certain amount of money, they may pare down their positions dramatically, potentially putting stocks they own under more pressure. In the letter, Coatue says "we have reduced our gross and net exposures to levels near historic lows because we are close to our drawdown target of -10 percent and volatility is running at least 2 - 4 times above normal."
Of course, Coatue's $7 billion in assets under management is unlikely enough to move the market much, even if it sold all of its long positions. But drawdown limits, which are generally measured from a fund's peak to trough performance, are common among hedge funds. For instance, some parts of Point72, formerly known as SAC Capital Advisors, have limits that are much tighter than 10 percent, according to people familiar with the matter. Point72 declined to comment.
The real risk is that many funds with similar portfolios decide to get out of their positions—either because they hit drawdown limits or just to err on the side of caution. While funds are no doubt aware of such a possibility, many wind up building very similar portfolios given the small universe of large, liquid stocks that make sense for multibillion dollar funds.
Indeed, a look at some of Coatue's peers reveals significant overlap based on the latest regulatory filings from Dec. 31. Consider a group of eight funds with technology exposure, including JAT Capital Management. Together, they owned $18.3 billion in stocks also owned by Coatue Management at the end of 2013. The funds either declined to comment or didn't respond to requests for comment from CNBC Digital.
Many of those funds can also be considered distant relatives of Coatue, which is known as a Tiger Cub because its founder Philippe Laffont previously worked at Julian Robertson's Tiger Management. The other funds include some that have received seed money from Robertson or have other links through employees.
The notion that Tiger-linked funds hold similar positions is nothing new. A February study by Novus Research points out that the average overlap between portfolios has ranged from 9.8 percent to 16.5 percent since 2006.
Which stocks might have been affected in March? One that might have felt an impact from hedge-fund selling is online travel company Priceline Group. Coatue and the eight other funds mentioned held $3 billion worth of stock at the end of the year, equivalent to about 5 percent of the market capitalization and over two days of trading volume. Such a stock tends to be momentum driven, so a large number of new sellers has extra potential to make an impact.
The flipside may be that hedge fund selling, while potentially painful in the short term, could have a temporary effect on price. While Priceline fell 12 percent in March, it has risen 1 percent in April in volatile trading. Indeed, gross exposure, including long and short positions, has actually increased slightly since the beginning of April, according to Morgan Stanley. So to the extent funds sold for nonfundamental reasons, others may have seen opportunity.
—By CNBC's John Jannarone.