The latest data on hedge funds’ second-quarter holdings came out in mid-August, but the review of those positions is ongoing. According to 13F filings from some of the largest hedge funds, managers are shifting back to growth stocks, although they remain more skewed toward value than has been the case over the past few years.
Hedge Fund Performance Improves
According to Goldman Sachs’ latest “Hedge Fund Trend Monitor,” performance among fund managers has improved recently, which often happens when the stock market rebounds following a correction. The average equity hedge fund fell 9% for the first half of the year but gained 4% between the beginning of July and mid-August.
Q2 2022 hedge fund letters, conferences and more
Stock-Picking Hedge Funds Struggle In Volatile Markets
This year has been a tough year for stock traders. The S&P 500 stock index is down 16% so far this year, putting it on track for its worst year since 2008. While these numbers may not seem bad on their face, the dispersion of returns between the best and worst performers Read More
Goldman suggested that the market rebound and the recent outperformance of growth stocks has led to improved performance among hedge funds. After lagging the S&P 500 by 11 percentage points in the first six months of the year, Goldman’s “Hedge Fund VIP” (very important positions) list gained modestly between mid-June and mid-August.
Unsurprisingly, Big Tech dominates the VIP list, as it has for the past several quarters, despite the widely reported swing from growth to value stocks that has resulted in tech underperforming. According to Goldman’s analysis of 13F filings, hedge funds have largely increased their net tilts in information technology and consumer discretionary while reducing their exposures to energy and materials.
As has long been the case- FAAMG’s mega-cap names remain at the top of Goldman’s “Hedge Fund VIP” list. The top 10 stocks on that list are: Amazon (NASDAQ:AMZN), Microsoft (NASDAQ:MSFT), Alphabet (NASDAQ:GOOGL), Meta Platforms (NASDAQ:META), Visa (NYSE:V), Apple (NASDAQ:AAPL ), Uber Technologies (NYSE:UBER), Mastercard (NYSE:MA), Berkshire Hathaway (NYSE:BRK.B), and ServiceNow (NYSE:NOW).
Some Big Tech Names Look Cheap Now
Average portfolio weights among hedge funds with these stocks in their top 10 holdings ranged from 6% to 9% in the second quarter. While these stocks have generally underperformed year-to-date and even over the past month, the fact that so many hedge funds hold them with significant concentration suggests that it’s only a matter of time before they back in favor of the market as a whole.
Additionally, their underperformance makes many of these names look cheap compared to their historical prices. On average, Goldman’s Hedge Fund VIPs have outperformed by an average of 39 basis points per quarter since 2001.
While the basket has underperformed the S&P 500 year to date, returning -22% versus the index’s -10%, it has a strong track record of outperformance. Goldman’s Hedge Fund VIPs have outperformed the S&P 500 in 59% of quarters since 2001.
Unfortunately, the basket sustained its worst underperformance on record between early 2021 and June 2022, lagging the S&P by 28 percentage points. However, its long-term track record of outperformance compared to the S&P 500 suggests it may offer some leads for investors looking to follow the so-called “smart money.”
However, they should be aware that this approach comes at the cost of increased volatility.
Hedge Funds Increase Their Concentration
Another strategy for investors who want to follow the “smart money” is to look at the most concentrated positions in hedge funds. In the second quarter, the hedge fund’s average portfolio weight in its top 10 positions reached 70%.
That’s the highest concentration observed since the first quarter of 2020. Meanwhile, position turnover dropped to 23%, a new all-time low.
According to Goldman Sachs, the strategy of buying the 20 most concentrated stocks in the S&P 500 outperformed the index in 60% of the quarters with an average excess return of 162 basis points per quarter. The firm defines “concentration” as the share of market capitalization owned by hedge funds.
Most of the stocks in Goldman’s High Concentration basket are mid-caps toward the lower end of the S&P 500’s capitalization distribution. The firm reports that hedge funds own 12% of average market cap of the constituency but only 3% of the average stock in the S&P. Additionally, hedge funds own less than 1% of the common stock in Goldman’s Low Concentration basket.
High Concentration Stocks
Year to date, the company’s High Concentration basket has underperformed the S&P 500 by four percentage points. Although it outperformed the index earlier in the year, it has lagged since May.
The top 10 stocks with the highest hedge fund ownership in the second quarter were: Bath & Body Works (NYSE:BBWI), Incyte (NASDAQ:INCY), Domino’s Pizza (NYSE:DPZ), TransDigm (NYSE:TDG) , Invesco ( NYSE:IVZ ), Caesars Entertainment ( NASDAQ:CZR ), Expedia ( NASDAQ:EXPE ), Qorvo ( NASDAQ:QRVO ), PVH ( NYSE:PVH ), and Take-Two Interactive ( NASDAQ:TTWO ).
As can be seen above, the top 10 most important positions and the stocks with the highest concentration differ in their sector concentration. Goldman found that hedge funds favored technology and consumer discretionary in the second quarter.
A closer look at the two lists above shows that the Hedge Fund VIP list is dominated by technology, while the most concentrated position is dominated by consumer discretionary.
Buy Rising Stars
A third way of using hedge fund holdings to build portfolios involves looking at positions that Goldman Sachs has tagged as “rising stars.” The firm explained that changes in popularity among hedge funds can indicate significant changes in future performance in stocks.
Over the past two decades, stocks with the largest increases in the number of hedge funds owning them tend to outperform their sector peers in subsequent quarters. On the other hand, “falling stars,” or those with the largest decline in the number of hedge funds that own them, have underperformed their peers.
Rising stars highlighted by Goldman in the last “Hedge Fund Trend Monitor” have outperformed falling stars since the firm released that report. Goldman Sachs also reported that there were no stocks among the rising stars of the second quarter on the list from the first quarter.
Rising And Falling Stars
The top 10 Russell 1000 stocks with the largest increase in hedge fund ownership in the second quarter are: Switch (NYSE:SWCH), Chevron (NYSE:CVX), Tyler Technologies (NYSE:TYL), Nucor (NYSE:NUE ), Berkshire Hathaway (NYSE:BRK.B), FedEx (NYSE:FDX), NCR (NYSE:NCR), Boston Properties (NYSE:BXP), State Street (NYSE:STT), and Marathon Petroleum (NYSE:MPC) .
This basket contains a wider range of sectors, including not only the highly favored information technology sector but also energy, which hedge funds typically dump in the second quarter despite individuals this stock categorized as a rising star.
On the other hand, the top 10 falling stars in the Russell 1000 are: AT&T (NYSE:T), Confluent (NASDAQ:CFLT), Cleveland-Cliffs (NYSE:CLF), Verizon (NYSE:VZ), Masco (NYSE:MAS) , UnitedHealth (NYSE:UNH), Deckers Outdoor (NYSE:DECK), NVIDIA (NASDAQ:NVDA), Ball (NYSE:BALL), and Lowe’s (NYSE:LOW).