Hedge funds are ending the year on a high note as their top picks outperform, according to Goldman Sachs Group Inc.
“Hedge fund favorites have rallied sharply so far” in the fourth quarter after struggling in the prior period, strategists including Ben Snider and David Kostin wrote in a note Monday.
Goldman’s list of most-popular hedge fund long positions has outperformed the S&P 500 by 200 basis points since the start of October. They’ve got some ground to make up, though, as those holdings have lagged the gauge by 4 percentage points so far in 2019.
The average equity hedge fund is returning 10% year-to-date, they said.
Crowding risk still remains elevated, the strategists said, continuing a theme they discussed in a previous report in August. When rallies peak, too much professional money can try to get out of the same stocks simultaneously and exaggerate declines.
Points from the report, which analyzed 833 hedge funds with $2.1 trillion of gross equity positions and is based on 13-F filings as of Nov. 14, include:
- The number of funds holding Amazon.com Inc. as a top-10 position dropped to 78 from 95
- Names that are new on the list of 50 stocks appearing most frequently in the top-10 holdings of hedge funds include Fiserv Inc., Global Payments Inc. and KKR & Co.
- Funds are selectively adding cyclical exposure, with industrials now at the largest net overweight tilt since 2008; health care remains the largest overweight
“Funds slightly increased their exposure to cyclical stocks” in the third quarter, “but remain much less exposed to cyclicals than they have usually been in the past,” the strategists wrote. “Funds also increased their allocations to firms exposed to U.S.-China trade during the third quarter as the stocks priced rising optimism regarding a potential trade deal.”
Still, hedge funds haven’t yet tapped into the outperformance of value shares, Goldman said. Fund holdings also show little concern about potential regulation of “Big Tech,” with weights of Amazon, Facebook Inc. and Alphabet Inc. near the highs of recent years. The big overweight in health care reflects little fear of policy risk ahead of the U.S. presidential election.
“Funds have embraced some macro rotations but resist others,” the strategists said.
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