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The Definitive Hedge Fund Holdings Update
If you are one of the unlucky few forced to buy and sell stocks for a living, based on some sort of "analysis", be it fundamental, technical, lunar, sun-spot, haruspicate, or on any other divination of the future, you have our condolences. That said, should you find yourself in this sad predicament, more than anything you probably want to know if what you are buying (having made the decision to buy it, or heaven forbid, short) is the right stock based on what other BSDs, aka hedge funds are buying, i.e., if the name you have shorted has 95% short interest and is about to go up by 10,000% overnight after yet another Goldman "conviction buy" upgrade-based short squeeze, if hedge fund groupthink momo cliques are about to bail en masse from the latest and greatest "sliced bread" stock, and many other such considerations. Well, you are in luck, Goldman's David Kostin has just released his quarterly hedge fund trend monitor, and it is chock-full of tens of charts of valuable information. Let's delve in.
First, Goldman's summary of the the results:
Hedge Fund re-risking slowed following large increases over 2009
Hedge fund long equity assets appreciated by 3% in 4Q compared with a 6% return for the market suggesting levered funds were net sellers. Funds now own 3.8% of the Russell 3000 index compared with 2.9% in 4Q 2008.
Little change in net long exposure and net weighting in cyclicals
Hedge fund net long exposure increased only modestly to 42% in 4Q from 40% in 3Q. Net weighting in cyclical sectors rose to 73% from 72% last quarter. Funds rotated within the cyclicals, moving out of Information Technology and into Industrials and Consumer Discretionary.
Hedge funds rotate into Industrials and out of Info Tech
Hedge funds are underweight Information Technology for the first time since 2005 when comparing their net weighting with the Russell 3000. Hedge funds lifted their net weighting in Industrials to 9% from 6% during 4Q, the largest increase of any sector, but they remain net underweight.
And with that preamble out of the way, here are the relevant charts.
In Q4, hedge funds started to rotate out of IT and defensive sectors, and rotate into cyclicals, mostly industrials. Additionally, after surging from Q2 to Q3, net long exposure, at 42%, has commenced to plateau. Most notable, HF ownership of US equities has hit an inflection point and is now declining.
A more detailed look into IT and industrial exposure, as well as specific stocks in these industries. IT stocks getting thrown out with the bathwater include NSM, FIS, EBAY, FFIV, and ONNN. On the other end, Industrials which have gotten the valueinvestorclub stamp of approval are SWK, AONE, FDX, ITT and BUCY.
Next up, is the Goldman Sachs VIP list, or the names that "most frequently appear among the largest 10 holdings of hedge funds." No surprises here: this is groupthink central. The contrarians among you will be shorting the following names with reckless abandon: AAPL, PFE, BAC, GOOG, JPM, MSFT, MA, DTV, WFC, CVS (after all, the pre-marginal buyers are in. At this point it is just the retail investors left to provide marginal buying).
Next, Goldman looks at the most concentrated Hedge Fund holdings: i.e., the stocks whose holders are primarily represented by hedge funds.
And, inversely, here are the stocks most hated the most by hedge funds:
Next up, let's not forget the short side. Here is how Goldman estimates hedge fund short exposure:
Short positions shed light on the “other side” of fund portfolios
We combined $621 billion of single-stock and ETF long holdingin 13-F filings of 627 hedge funds with our estimate of hedge fund short positions (based on $425 billion in single-stock, ETF and market index short interest positions filed with exchanges). We estimate hedge funds accounted for 85% of total short interest positions, or $361 billion as of December 31, 2009. Our analysis suggests the typical hedge fund operates 42% net long, up from 40% in 3Q 2009 and up from 21% at year-end 2008. Part of the short positioning is conducted at the market level via ETFs.
Short positions offer more comprehensive insight to hedge fund sector tilts. Our analysis of short interest data suggests that hedge fund sector net exposure may differ from what 13-F filings indicate. For example, Energy represents 9% of hedge fund long holdings, underweight relative to the Russell 3000. However, hedge funds hold a relatively small amount of shorts in the sector, suggesting that funds are actually neutral Energy on a net basis.
Hedge Funds appear net underweight Info Tech for the first time since 2005. Hedge funds appear to hold a 16% net weighting in Info Tech versus 20% weighting in the Russell 3000. Hedge funds reduced exposure to Info Tech on the long side (17% vs. 19% in 3Q) and increased allocation to the sector on the short side (18% vs. 17% in 3Q). Hedge funds were last underweight Info Tech in 2005 although funds were neutral in 2007.
Financials appears neutral on the long side of hedge fund portfolios (16% vs. 16% Russell 3000 weighting). However, short interest data indicates that Financials also accounts for 19% of all short positions, the highest weighting of any sector. This suggests that funds indeed “hedge” their Financials exposure. Combining long and short data, hedge funds appear to hold a 12% net weighting in Financials.
Industrials net long exposure rose to 37% from 26% last quarter. Although Materials and Telecom Services represent just 9% of gross assets, Hedge Fund have the highest net long exposure to these two sectors, consistent with the previous two quarters.
We believe hedge funds account for the vast majority of short positions. The steady growth of shorts in the US equity market during the past eight years has accompanied the rise in hedge fund assets (see Exhibits 15 & 16). We estimate that hedge funds account for 85% of all short positions. In the future, mutual funds may become a larger share of the short market, given initiatives such as 130/30 programs. Short interest for the S&P 500 declined over the second half of 2009. Currently, 2.1% of equity cap is held short while the short interest ratio remains at a 10-year low.
We construct a “typical” long/short hedge fund portfolio. Combining our hedge fund long and short data, we constructed two 50-stock equal-weighted portfolios (one long and one short) in an attempt to replicate a “typical” hedge fund (see Exhibits 17 and 18).
We acknowledge certain limitations to our hedge fund short position analysis. There is time delay, as short interest is filed bi-weekly with the exchanges and released with a 10-day delay. The short interest information we have represents positions reported by U.S. broker/dealers. Broker/dealers incorporated outside the US do not have to report their positions. Swaps and other derivatives are also not captured in this analysis.
For all you "alphaclone" fans, or whatever it's called, who think there is some incredible complexity to recreating a hedge fund portfolio, here is the typical hedge fund long portfolio.
And yes, there is short exposure too.
Some interesting observations from Goldman on ETFs. We will have substantially more to say on this topic tomorro, not so much for hedge funds, as for firms like Goldman itself.
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 $84 billion in gross exposure to ETFs, compared with $982 billion of gross exposure to single-stocks.
The $65 billion of short ETF positions accounts for 77% of the hedge fund gross ETF exposure. In contrast, single-stock short positions ($310 billion) represent 34% of hedge fund gross single-stock positions. The most shorted ETFs tend to be index hedges (representing $32 billion of the $65 short positions). Commodity-related ETFs appear to be the only ETFs that hedge funds utilize on the long side.
ETFs now represent 3% of long assets, down from 6% in 1Q 2009. This is consistent with a falling correlation environment, in which stock-picking comes into focus.
And here are some summary tables.
First - the 50 stocks with the largest number of hedge fund investors.
The stocks with the greatest hedge fund rotation in and out of their holdings.
Listing out the small cap (under $1 billion mkt cap) stocks with the largest hedge fund concentration.
And large cap...
The top 50 stock seeing the greatest hedge fund inflow:
And outflow:
This chart may be the most relevant to many of you, who are focused on capturing the short squeeze in the small caps, where violent moves to the upside on a concerted effort to trap shorts, have worked so well on so many occasions.
And here are the big cap stocks with the biggest short interest:
Lastly, here are the top 100 hedge funds listed by Equity assets (not AUM, and excluding credit and other holdings). Note that of the top 10 HFs, there are 4 quant names, 5 if in the top 11. Of the top 11 hedge funds, which control $160 billion in Equity assets, 5 of the names are quants and these have $102 billion in equity assets. Roughly 63% of equity assets in the top 10, well 11, are controlled by quants.
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Good god Tyler, you must cloned yourself, because there is a veritable non stop barrage of info.
No shit! When do you sleep? Or do you even sleep?
The real question is, when do we sleep!
I will pitch that I think ZH should start a hedge fund.
They would have to drop the Zero
Don't drop that part, just hide it behind something Europhilic. Swedish seems to do nicely.
How does NollaHedge sound to you?
I think ZH is more like the Lakota scouts watching the Hedge Funds run through their Valleys in search of Lebenstraum and Gelt, thinking Seven Generations ahead.
++
shee-it. Give me a week; I might be able to process all of that info.
I think we all need to chip in and find Tyler a home. He needs a place to sleep.
:)
Great post Tyler. I just can't believe that they don't go over this stuff on cnbc.
JK
Easy ... In Detroit, maybe we can find one for $5000
Nice to see Shaw at the top of the list but how is it that a fund can consistently deliver above average returns? My guess is that they have discovered the the theory of "everything".
If the theory "of everything" is all about chasing everyone's tail a bit faster, they are indeed.
BoA, Wells Fargo, Citi. very popular with hf.
moral hazard.
also, if they do lose on banks, they get a pass of sorts from clients who read the same stuff we do, i.e. the spin that all is well with the banks, they are healthy again, full steam ahead, every bank analyst in the world has upgraded each other in a lovefest rivaling Woodstock......
Citi is clearly a lottery ticket.
WFC is rotten to the core.....watch the price action when buffett kicks the can as he has been theeeeee largest supporter and cheerleader...
BAC......i'm no fan, but on a 2+yr basis, there is potential for growth in the share price if someone is willing to wait that long and understand that there is genuine risk.
Wow, amazing post & info, I need a guide to lead me though it all!
Thanks for posting this TD.
They forgot Citadel. Currently around 15B post 07and08 shornings.
They also forgot Wexford. Those guys are smarter than any of those listed.
Citadel's convertibles most likely under FI and not equity. I know they own equities but I think FI is still the bread and butter but I guess the same could be said for Bridgewater.... maybe they are giving Ken the brush off!!
Can someone post the pdf for this entire GS piece if you have it?
Without mentioning names, there seems to be one hedge fund which has a very cynical modus operandi, which is to load up on small cap, thinly traded names, then juice them with aggressive buying toward the end of the reporting period. After the end-of-period ramp, the "performance fee" is calculated and paid to the fund manager, who is rather wealthy now.
This is a great strategy in a bull market, when selling pressure is minimal, but gets hammered in a bear market when natural sellers emerge and the equities are less easily manipulated.
Again, without naming names, there is a fund which fits this profile. Of course this has to be an error, as the SEC would never allow such a thing to go on. I mean, if someone could get away with this, then one could imagine that it also would be possible for a well respected man to run a giant Ponzi Scheme for decades, which is of course absurd.
TS Eliot...haruspicate...nice. That's the most esoteric word I've seen all week.
Indeed. A word to communicate; as useless in modern discourse as it is rare.
Thank you for the information. As one who manages equities professionally it is nice to have this type of data to manage around and sometimes game these positions. It is perfectly logical that the HF's use ETF's primarily for shorting... but interesting when you think about the fact that the low cost solution for the small investor enables the HF's to efficiently manage risk and keep their borrowing costs down. Thanks again.
Dammit Beavis, Hildebrand just did it again. Why cant the chf just trade where it wants to trade?
Great work! I am truely impressed once again.
You should upgrade your website to become more info/data centric (make it easier for the user to find stories and docs with a friendy search engine and some kind of folder like categories) and less forum like, all posts should be PDF downloadable and start charging 50 bucks a month.
dismiss yourself for suggesting fiat barter
Ok ok. Charge 2 silver coins and half a gold coin.
well, u can't say GS doens't do there homework, i find it interesting this stuff get's out without them throwing a snit fit
of course alot of it is pretty obvious
I think for myself. I don't believe a word Goldman Sachs has to say. My presumption is that anything they say is to influence other traders and investors in order to maximize Goldman's own returns.
I think of Goldman Sachs as the school yard bully that the principle just loves. Goldman struts around the financial markets punching people in the stomach and taking their lunch money, and, when you complain to the teachers, they just look at you in disbelief.
Goldman Sachs, like most firms, is interested in one thing and one thing only: making money for themselves as fast as they can. A secondary goal is to exert as much power into government as far as they can, and, trade off of inside info of upcoming policy decisions.
It's really not complicated. Money, power, and information.
bbbbut, they're doing "God's work"....
The principal doesn't love the school yard bully as a matter of principle but may indeed turn a blind eye like a dea'd agent at the ghetto border where the white guys come from college.
I totally agree! Nevertheless, Tyler has done an outstanding work!
I love the smell of disinformation in the morning....
Hey. This is Maz Jadallah, Founder at AlphaClone. Great post. For the record, we have never claimed that what we do is conplicated or complex as you insinuate in your post. Every clone we generate discloses the strategy and manager or managers it is based on. If there is any single take away from our research it is that "who you follow matters a great deal". Following or cloning all 630+ hedge funds as the GS report does makes no sense in our opinion. You can see that on the performance of our AlphaClone Index group (which includes all managers we tack) versus fund groups that combine only a few managers such as Value Masters or our Tiger Cubs group. You can even create and clone your own custom group. Our service is not about complexity, it is about convenience and giving the investor a powerful insight discovery tool. A goal that I guess we share with ZH.
"If you are one of the unlucky few forced to buy and sell stocks for a living,". Surely there are more honest ways to support yourselves. Step back from the computer. Put down the chips, pretzels and, buzz cola. Open the bedroom door and talk to your mother, father, brother or sister. Open the front door and gaze at the out-of-doors. This is the real world. You are aiding in it's destruction. Get a real job that requires physical labor because that is the real economy. You're going to need the practice in the very near future.
Do anybody have renaissance techno's latest letter to investors (as well as Adage's and Lone Pine's letter)?
You may find a lot of hedge fund's stuff on internet but not theese letters.
These dumb-ass hedge funds have got it backwards. They should be 100% short.
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