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For hedge funds, all aboard the bubble bandwagon

Third Point says harsh weather hit Q1
Third Point says harsh weather hit Q1

In a letter issued Thursday, the prominent hedge fund Third Point used the same charged word to describe certain stock-market sectors that rival money manager Greenlight Capital had invoked the week before: "Bubble."

"Looking back, perhaps our optimism at the beginning of the year was misplaced," wrote managers at Third Point, the fund run by founder Daniel Loeb that invests more than $14 billion. "First, certain sectors were clearly exhibiting bubbleicious valuations."

While avoiding more specifics on which sectors they were talking about, the Third Point managers issued a warning about the market choppiness that is likely to follow the termination of the Federal Reserve's bond-purchasing initiative as early as October.

"We will have to buckle our seatbelts for an inevitably more volatile environment," they wrote.

Read MoreLoeb's Third Point warns of 'bubblelicious' market

Siegfried Layda | Getty Images

Third Point, which proceeded to talk up some of its favored stock positions (Softbank, IHI) as well as offer some additional pointers for a recent activism target (Dow Chemical), played coyer than its counterparts at Greenlight had on April 22. Greenlight has called out the technology sector for being in its second bubble in 15 years.

But the upshot was the same: Price-to-earnings ratios in many companies have been absurdly high, and the market is reverting to fundamental drivers for company earnings, benefiting those investors who are best at pinpointing them.

And the growth sectors that saw some of the biggest run ups of the last couple of years have become ground zero for doing better diligence. Rather than piling in to popular names with sky-high P/E ratios, as they may have last year and the year before, many investors are beginning to believe that the era of goodwill despite meager earnings is ending, with the market turning to metrics such as longer-term cash flow instead.

Read More'Danger signs arethere' for credit bubble: Pro

For April, a handful of hedge funds that reportedly held long positions in some of the higher-flying stocks were down.

The London-based fund company Lansdowne Partners' developed market fund slid nearly 6 percent through late April, and is down about that much year to date, according to a recent hedge fund report. Although which stocks are in which specific fund can be difficult to know, Lansdowne's various investment portfolios include Amazon, Netflix, LinkedIn, and Twitter as of the last filing period.

One of the key funds at Maverick Capital, whose top reported position earlier this year was eBay, is down about 3 percent for both late April and the year to date.

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Even Third Point, despite being up more than 2 percent for the year, fell a little more than 1 percent in April. (Its first-quarter letter named SoftBank, Sotheby's, FedEx, and Dollar General as some of the worst-performing positions, but it isn't clear what dragged down results.)

For Greenlight, however, turning bearish on what it dubbed "bubble stocks" appears to be working well.

During April, the same month it issued its letter describing the current period as the second tech bubble in 15 years and outlined its strategy of shorting a basket of momentum stocks, the fund returned more than 4 percent, bringing its year-to-date performance up to 3 percent.

—By CNBC's Kate Kelly.