The hedge funds They make money regardless of what the markets do. And in times like the one we are experiencing right now, it is worth analyzing what they are doing. So all said and done, today we are going to discover four big themes that we can now take advantage of for our stock investment portfolio.
1. Hedge funds have had a promising start this quarter.
Recently, investment bank Goldman Sachs analyzed nearly 800 US-based hedge funds focused on stock investing, with investments worth about $2.4 trillion. This analysis showed that on average their investments had fallen by 12% during the first half of the year. Of course, the 4% profits they have generated so far in the third quarter have caused them to drop "only" 9%, which is better than the 14% drop in the S&P 500 so far this year.
How do we take advantage of this opportunity?
One of the ways to follow hedge funds is to replicate their most popular bets in aggregate. That strategy would have caused us to lose 22% this year overall, but if we time our stock investment to the S&P 500's June low, it was up about 18% at this point, slightly outperforming the US market over the year. same period. This isn't to say that timing the market is easy, but now might be a good time to consider buying again.
2. Amazon is the most popular bet of hedge funds.
Of the 50 assets that regularly appear in the top 10 of hedge fund holdings, Amazon is the most popular, displacing Microsoft. At the same time, View has replaced Apple in the top five positions. And overall, the group of hedge fund favorites has added 14 new members recently: AMD, Bank of America, Citi, Charles Schwab, Biohaven, Crown, Centene, Danaher, Elastic, MercadoLibre, Netflix, PayPal, RH and Atlassian.
How do we take advantage of this opportunity?
The basket of the best hedge funds has outperformed the S&P 500 in 59% of the quarters since 2001, with an average quarterly return of 0,39%, making it a smart bet to consider if we are looking for new ideas investment in shares. Typical hedge funds have 70% of their buy ideas in 10 companies at the end of the last quarter. Hedge fund "concentration" hasn't been this high since before the pandemic, and with the amount they shifted their investments falling to a new all-time low last quarter, we can interpret that they are being more cautious. That could mean that the time has come to analyze new investment opportunities.
3. Hedge funds have returned to investing in growth stocks.️
In the first quarter, hedge funds exited the investment in growth stocks, such as the consumer discretionary and information technology sectors. They made a change of course and poured into value stocks, such as the energy and materials sectors. This trend has recently begun to change. Hedge funds have increased their investment in stocks in the consumer discretionary and technology sectors, and reduced some of their positions in the energy and materials sector. They have done well this past quarter, as technology has outperformed the S&P 500 by 5%, and consumer discretionary by 10%.
The trading volume of growth stocks is higher than that of value stocks. Source: Ycharts.
How do we take advantage of this opportunity?
Despite the recent change in trend, hedge funds remain more positioned in growth sectors, such as technology, and in relation to value sectors, such as materials and energy. Put another way, if we compare the allocation of funds in each sector by matching the overall composition of the market (i.e., about 25% technology, 13% consumer discretionary, etc.), they still have less invested in technology and more in materials and energy, even after adjusting their portfolios a bit. Although hedge funds' renewed interest in technology is probably great news. Therefore, this interest translates into a sign of optimism but not as a signal to fill our investment portfolio in growth stocks.
4. Hedge funds are taking on less risk overall.⚠️
Hedge funds' "net leverage" (the difference between the amount they are spending on going long on companies and shorting them) remains near the lowest levels since March 2020. In fact, according to the data Calculated by Goldman Sachs, leverage is 27% compared to the last five years and 11% compared to the last three.
Net leverage can tell us where the investment in hedge fund stocks is going. Source: GSIR.
How do we take advantage of this opportunity?
In most of the S&P 500's declines of 10% or more since 2011, hedge fund leverage and profitability have recovered near the market bottom, just as they appear to have done since the S&P 500's mid-year low. of June. History suggests that hedge funds will begin to take on more risk and their biggest bets will continue to outperform the market for the rest of this year. We can interpret that now is a good time to start incorporating some of the investment ideas in hedge fund shares mentioned above into our portfolio.