Apple Is Now Held By 190 Hedge Funds, And Other Groupthink Observations

Tyler Durden's picture

Perusing the latest hedge fund trend monitor from Goldman Sachs, we find that the world's biggest groupthink stock and hedge fund hotel, Apple has just been upgraded from 5 stars to 6 stars. Compared to our last update, when we uncovered that a whopping 181 funds were long the name, this number has subsequently risen even more, and most recently 190 hedge funds (not including mutual funds) were long the name. Should the company, which is priced beyond perfection, have some unpleasant news to report ever in its future, just hedge funds will need at least 2 straight days to liquidate their holdings in the name.

Going down the list, all of the top 10 most popular stocks are held by at least 100 hedge funds, in essence this means that with everyone chasing the same trades, and with an ever greater confluence of investment theses, there is increasingly less logic in paying someone 2 and 20 when virtually everyone is pursuing the same long strategies. And lastly, there will very soon be an ETF for that.

Here is Goldman's summary of hedge fund exposure:

Materials exposure rose in 3Q but gold allocation is not the cause

Allocation to Materials rose by 160 bp to 8.5% in 3Q, and Materials remains the most overweight sector relative to the Russell 3000 (8.5% vs. 4.1%).
Using long-only single- stock equity and ETF positions, hedge funds still appear overweight (7.9%). When we combine long and short exposures in both single stocks and ETFs, hedge funds appear to hold a 12.7% net weighting in Materials.

Hedge fund positioning implies the use of gold as an inflation/deflation hedge
. Hedge Funds own approximately $8.6 billion of the SPDR Gold Trust ETF (GLD) and three of the four Materials stocks in our Hedge Fund VIP (GSTHHVIP) basket also have a gold focus: Barrick Gold (ABX), Freeport-McMoRan Copper & Gold (FCX) and Newmont Mining (NEM).

However, this quarter’s Materials increase does not appear to be gold-related. The aggregate ownership of the Russell 3000 Gold subsector actually decreased by 17bp. Aggregate holdings of GLD increased by $555 million to $8.6 billion, but much of the increase may be performance-related. Even with the increase, hedge fund long GLD holdings are now 1.2% percent of the total long portfolio, down from 1.3% in 2Q 2010.

The increase in Materials allocation during 3Q 2010 appears to be M&A-related
. In mid-August, BHP Billiton announced a hostile takeover of Potash Corp (POT). Hedge fund ownership of POT rose from 2% to 16%. The average weight of POT in hedge fund portfolios rose to 0.8% from 0.1%, almost half of the long allocation increase in Materials between 2Q 2010 and 3Q 2010. The percent of Potash’s market cap held short did not have the same dramatic increase, further skewing the long/short allocation difference. The acquisition was cancelled in mid-November, after the 13-F holdings date.

Analyzing hedge fund sector positioning, net exposure, and size tilt

Hedge funds’ net weighting in Information Technology is the highest of all sectors at 20% followed by Health Care. Hedge Funds remained most underweight Consumer Staples and Financials.

The typical hedge fund allocates 35% of its assets to stocks with less than $2 billion in equity capitalization and 35% to large–caps ($10+ billion). Mid-cap stocks ($2-$10 billion) account for 30% of the average fund’s portfolio. On an aggregate asset basis, hedge funds allocate just 20% of their assets to small-cap stocks, while 45% is allocated to large- cap stocks. The difference between the average and the aggregate suggests that the hedge funds with the largest assets under management target large-cap stocks.

And just like financials outperformed in Q4 as HFs rushed to fill underexposure, so too GLD may soon suffer the same fate, since it appears that gold, which outperformed stocks by nearly three times in 2010, was once again unloved in Q3 by hedge funds.

Hedge Funds appear 9pp (900 bp) overweight Materials when comparing their net weighting with the Russell 3000. Hedge fund long-only single-stock equity holdings indicate funds are overweight Materials relative to the Russell 3000 (8.5% versus 4.1%). Using long-only single-stock equity and ETF positions, hedge funds still appear overweight (7.9%). Short interest data indicates Materials accounts for 4.8% of all short single-stock equity and ETF positions. Combining long and short data, hedge funds appear to hold a 12.7% net weighting in Materials and are more overweight relative to the Russell 3000 than long exposure suggests.

Materials sector allocation now represents the biggest discrepancy between long and short portfolio positioning. This is the first time since 2006 that Financials positioning has not been the biggest discrepancy.

Hedge fund positioning implies the use of gold as an inflation/deflation hedge.
Hedge Funds own approximately $8.6 billion of the SPDR Gold Trust ETF (GLD) and three of the four Materials stocks in our Hedge Fund VIP (GSTHHVIP) basket also have a gold focus: Barrick Gold (ABX), Freeport-McMoRan Copper & Gold (FCX) and Newmont Mining (NEM).

However, this quarter’s Materials increase does not appear to be gold-related.
The aggregate ownership of the Russell 3000 Gold subsector actually decreased by 17bp. Aggregate holdings of GLD increased by $555 million to $8.6 billion, but much of the increase may be performance-related. Even with the increase, hedge fund long GLD holdings are now 1.2% percent of the total long portfolio, down from 1.3% in 2Q 2010.

The increase in Materials allocation during 3Q 2010 appears to be M&A-related. In mid-August, BHP Billiton announced a hostile takeover of Potash Corp (POT). Hedge fund ownership of POT rose from 2% to 16%. The average weight of POT in hedge fund portfolios rose to 0.8% from 0.1%, almost half of the long allocation increase in Materials between 2Q 2010 and 3Q 2010. The percent of Potash’s market cap held short did not have the same dramatic increase, further skewing the long/short allocation difference. The acquisition was cancelled in mid-November, after the 13-F holdings date.

Next, on the topic of concentration, Goldman notes the following:

We define “concentration” as the share of market capitalization owned in aggregate by hedge funds. The strategy of buying the 20 most concentrated stocks has a strong track record over more than eight years. Since 2001, the strategy has outperformed the market by an average of 296 bp per quarter (not annualized). The back test suggests that this strategy works in an upward trending market but tends to perform poorly during choppy or flat markets. The stocks in the basket tend to be mid-caps (at the lower end of the S&P 500 capitalization distribution), which have outperformed large-caps from 2004 to 2007, contributing to the attractive back-test results. The baskets are not sector neutral versus the S&P 500.

The stocks with the “most concentrated” hedge fund ownership have underperformed the S&P 500 in 2010 ytd by 94 bp (+8.3% vs. +9.2%).
The “most concentrated” stocks underperformed steadily for most of 2007 and 2008, but significantly outperformed in 2009. Our “most concentrated” basket outperformed the S&P 500 by 616 bp in 3Q 2010 (+17.5% vs. +11.3%) after lagging by 303 bp in 2Q 2010 (-14.5% vs. -11.4%).

Our “least concentrated” basket has outperformed the S&P 500 in 2010 ytd by 229 bp (+11.5% vs. 9.2%). The “least concentrated” basket underperformed the market by 79 bp in 3Q 2010 (+10.5% vs. +11.3%) after outperforming by 440 bp in 2Q 2010 (-7.0% vs. -11.4%).

And since the topic of ETFs and how they are used by hedge funds continues to be one of the most misunderstood by the punditry, below is yet another explanation how ETFs are not investing but merely hedging vehicles in a world in which pair trades no longer work.

Hedge funds and ETFs: Hedging tools, not investment vehicles

Hedge funds appear to use ETFs more as a hedging tool than as a directional investment vehicle, based on our analysis of 13-F and short interest filings
. We estimate that hedge funds hold $106 billion in gross exposure to ETFs compared with $1 trillion of gross exposure to single-stocks.

The $81 billion of short ETF positions accounts for 76% of the hedge fund gross ETF exposure. In contrast, single-stock short positions ($356 billion) represent 24% of hedge fund gross single-stock positions. The most shorted ETFs tend to be index hedges (representing $45 billion of the $81 short positions). Commodity-related ETFs appear to be the only ETFs that hedge funds utilize on the long side.

ETFs now represent 4% of long assets, down from 6% in 1Q 2009. This is consistent with a falling correlation environment, in which stock-picking comes into focus.

Continuing with more tables, below are the stocks with the highest change in popularity to the hedge fund community:

Going back to hedge fund concentration here are the names that are the biggest hedge fund hotels by market cap...

...and by industry sector.

Hedge funds also like beat down names. Below are some of the most hedge fund loved names with the highest percentage of short interest as a percentage of their market cap.

And last, since not one day passes in the hedge fund world without a pissing match of some sort, here are the top 50 hedge funds sorted by equity asset girth.

And while we can share more charts, since the only strategy that continues to work without flaws is the heatmapping approach, where HFTs buy stocks if they are green, and sell them if they are red, no amount of data granularity can break the dominant regime until Bernanke says so.