Hedge funds remained overweight growth stocks in the fourth quarter, helping to boost their aggregate performance as the market rocketed higher. Some of the names most popular with retail investors are among hedge funds’ favorites too, including Amazon.com, Microsoft, and Netflix. Uber Technologies was the stock bought by the most number of hedge funds last quarter, according to data from Goldman Sachs.
Hedge funds’ growth tilt boosted their returns in recent months, while the fast-growing stocks led the market higher. The most popular hedge fund positions are now Amazon.com (ticker: AMZN), Facebook (FB), Microsoft (MSFT), and Alphabet (GOOGL). Other well known stocks are high on the list, as well, including Salesforce.com (CRM) at sixth, Netflix (NFLX) at 10th, Apple (AAPL) at 12th, and Tesla (TSLA) at 43rd.
Within 45 days of the end of each quarter, hedge funds must report their portfolio holdings to the Securities and Exchange Commission on a regulatory form known as a 13F. Goldman Sachs analysts have reviewed the holdings of 859 hedge funds that managed $2.3 trillion at the start of this year.
Top value holdings for hedge funds in the fourth quarter included Berkshire Hathaway (BRK.B) and several big banks: Citigroup (C), Bank of America (BAC), and JPMorgan Chase (JPM).
Overall, though, hedge funds are holding pricey stocks. “Our Hedge Fund VIP basket currently carries a 33% price-to-earnings premium to the broad S&P 500 (25x vs. 19x), the largest on record,” Goldman Sachs analysts wrote in their report.
The 50 stocks—which the Goldman Sachs analysts call the Very Important Positions basket—returned 24% from the start of the fourth quarter until last week, while the S&P 500 index rose 14%.
Very Important Positions
Source: Goldman Sachs
The most concentrated ownership by hedge funds in S&P 500 stocks is in Incyte (INCY) and Expedia Group (EXPE), each with at least 20% of their market value owned by hedge funds. Meanwhile, First Republic Bank (FRC) and Dow ( DOW ) have been all but ignored by hedge funds,
On a sector level, managers slightly increased their positioning in information-technology stocks, which remained their greatest portfolio weight on aggregate. Tech stocks made up 19.9% of aggregate assets, though that’s below the Russell 3000’s 22.0% tech sector weight.
Compared with the wide-ranging Russell 3000 index, hedge funds are most overweight consumer discretionary, which represents 15.3% of their combined holdings, almost 5 percentage points more than the index. Health care is the next greatest relative overweight, while financials and consumer staples are the most out-of-favor sectors.
Hedge funds increased their tilt toward consumer discretionary the most in the fourth quarter, while reducing financials and energy—which became a hedge fund underweight to the Russell 3000 for the first time since 2007.
The favorite new buy of hedge funds in the fourth quarter was Uber Technologies (UBER). That appears to have been a good call: The ride-hailing firm’s stock struggled after its initial public offering earlier last year, but it’s rebounded sharply in 2020. It had been among the most exited positions by hedge funds in the third quarter.
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Other big new buys include Tiffany (TIF), Expedia, Home Depot (HD), Exxon Mobil (XOM), and Nvidia (NVDA). The list of reduced positions last quarter is topped by Signature Bank (SBNY), PG&E (PCG), and Fox (FOXA).
Following the smart money has been a winning strategy over the past 18 years, according to Goldman. Since 2002, the stocks that saw the largest number of new hedge-fund investors in a quarter outperformed other stocks in their sector by an average of 0.52 percentage point in the following quarter.
The Goldman team found the reverse holds true, as well: Stocks with the largest decline in the number of hedge-fund owners in a quarter have underperformed their sector peers by 0.60 percentage point over the next quarter.
Here are the top 10 new adds and most exited positions by hedge funds in the third quarter:
Rising Stars
Source: Goldman Sachs
Falling Stars
Source: Goldman Sachs
Write to Nicholas Jasinski at nicholas.jasinski@barrons.com
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February 26, 2020 at 01:25AM
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Here Are The Stocks Most Popular With Hedge Funds - Barron's
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