10 Market Conclusions Based On Recent Hedge Fund Exposure

Tyler Durden's picture

Yesterday we highlighted the top 50 stocks that comprise the hedge fund "darling" universe. And while it is good to know which stocks will get the chop first the next time there is a major margin call induced liquidation scare, as David Kostin points out in a follow-up piece there is a much more nuanced read through for Hedge Fund data. "We estimate hedge funds own roughly 3% of the US equity market. Turnover of all hedge fund positions averaged 34% during 3Q 2011 (nearly 140% annualized). The tilt of hedge fund holdings towards large-cap stocks has been increasing for almost 10 years. The typical hedge fund operates 36% net long, down from 2Q 2011. Combining long and short position data, hedge funds have the greatest net portfolio exposure to Consumer Discretionary (23%), Information Technology (20%), and Energy (14%)." he then proceeds to list the 10 conclusions that can be derived using the most recent public 13F data (which is understandable quite stale already in our day and age of sub-24 hour investment horizons). Yet the bulk of conclusions are mostly fluff save for the following: " The average hedge fund returned -2% YTD in 2011 through November 11th compared with +2% for the S&P 500", "Hedge fund returns are highly dependent on the performance of a few key stocks" and "The typical hedge fund operates 36% net long ($394 billion net/$822 billion long), versus 46% in 2Q 2011." So just why do people still pay 2 and 20 to chase popular, concentrated stock positions while underperforming the broader market again?

From Goldman Sachs

Our most recent Hedge Fund Trend Monitor report analyzed 679 hedge funds with $1.1 trillion of gross equity positions consisting of $655 billion of long stock-specific and ETF equity assets and an estimated $417 billion of short single-stock and ETF positions. We have published our Hedge Fund Trend Monitor quarterly for the past five years and analyzed constituent-level portfolio holdings of US hedge funds since 2001. The current report focuses on hedge fund positions at the start of 4Q 2011 and is based on 13-F filings as of November 15, 2011. We list 10 conclusions below:

1. We estimate hedge funds own roughly 3% of the US equity market. For context, US households directly own 33% of the domestic equity market, and indirectly own via mutual funds 21% of the stock market. ETFs account for 4% of the US stock market, slightly more than hedge funds.

2. Turnover of all hedge fund positions averaged 34% during 3Q 2011, representing an annualized rate of nearly 140%. The top quartile of positions (largest holdings) turned over just 20% (80% annualized) while the bottom-quartile of positions (smallest holdings) turned over 47% (188% annualized). Quarterly turnover at the sector-level ranged from a low of 32% in Health Care to a high of 36% in Financials (see
Exhibit 1).

3. The tilt of aggregate hedge fund holdings towards large-cap stocks has been trending higher for almost 10 years. Roughly 45% of the aggregate assets of hedge funds was invested in stocks with equity capitalizations greater than $10 billion as of 3Q 2011, up from 35% in 2002. Just 21% of aggregate assets are invested in small-cap stocks (below $2 billion). The typical hedge fund allocates 33% of its assets to large-cap
stocks ($10+ billion) and 38% to small-cap stocks. The difference between the average and aggregate suggests that the hedge funds with the largest assets under management target large-cap stocks (see Exhibit 2).

4. The typical hedge fund operates 36% net long ($394 billion net/$822 billion long), versus 46% in 2Q 2011. We estimate 20% of short positioning is conducted via ETFs with 15% occurring at the broad index level.

5. Combining long and short position data, hedge funds have the greatest net portfolio exposure to Consumer Discretionary (23.2%), Information Technology (20.2%), and Energy (13.7%). Hedge funds are not benchmarked but relative to the Russell 3000 universe they are 1,088 bp overweight Consumer Discretionary (23.2% vs. 12.3%), and 761 bp underweight Consumer Staples (3.6% vs. 11.2%).

6. The average hedge fund returned -2% YTD in 2011 through November 11th compared with +2% for the S&P 500. The distribution of performance showed that more than 15% of hedge funds returned -10% or worse. However, the S&P 500 has dropped by 8% during the past two weeks. Style matters for hedge fund performance given the average global macro fund returned 4% vs. -5% for the typical equity long/short fund through Nov 11th.

7. The strategy of buying the 20 most concentrated stocks has a strong track record over more than 10 years. We define “concentration” as the share of market capitalization owned in aggregate by hedge funds. Since 2001, the strategy has outperformed the market 69% of the time by an average of 271 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 “most concentrated” hedge fund ownership basket has underperformed the S&P 500 in 2011 YTD by 62 bp (1.2% vs. 1.8%). See Bloomberg ticker: <GSTHHFHI>. [ZH: we define it as crowding. And like all crowded trades the unwind always is a sight to behold]

8. Hedge fund returns are highly dependent on the performance of a few key stocks. The typical hedge fund has an average of 64% of its long-equity assets invested in its 10 largest positions compared with 31% for the typical large-cap mutual fund, 20% for a small-cap mutual fund, 19% for the S&P 500 and just 2% for the Russell 2000 index (see Exhibit 3).

9. Our Hedge Fund VIP list (Bloomberg ticker: <GSTHHVIP>) contains the 50 stocks that appear most frequently among the top 10 holdings of
fundamentally-driven hedge fund portfolios. The basket of stocks that “matter most” has outperformed the S&P 500 by 60 bp on a quarterly basis since 2001, with a Sharpe Ratio of 0.22. However, the VIP list has lagged the S&P 500 YTD by 347 bp (-1.7% vs. 1.8%). AAPL, GOOG, MSFT, JPM, and PFE rank as the top five stocks in our Hedge Fund VIP list (see Exhibits 4 and 50).

10. Turnover for the VIP basket was below the historical average with 14 new stocks entering the VIP list compared with an average turnover of 17 stocks since 2001. New constituents: ABX, CCI, CHK, CMCSA, DTG, EMC, HES, IBM, NEM, NWSA, OXY, PG, PM, and WMB. From an implementation standpoint, the hedge fund VIP list offers an efficient vehicle for investors seeking to “follow the smart money” based on 13-F filings. The VIP basket has a large cap bias with a median market capitalization of $42 billion compared with $11 billion for the S&P 500. The VIP list contains stocks from nine of the ten sectors (no Utilities).

GS - Hedge Fund Top Positions Take Home

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GeneMarchbanks's picture

'It is our view that Hedge funds mostly suck and offer poor returns, so come to Papa.'

-Goldman Sachs

economics1996's picture

The peasants are getting ready to scrape the parasites off the host.


redpill's picture

I'd like to be a fly on the wall to listen to all these supposed smartest people in the room explain to their clients why they can't outperform an index fund.

Conrad Murray's picture

Investing with hedge funds is like buying an iPad. It's an easy way for people to be hipsterish without having to use their underdeveloped brains, in which case they'd see there are far better alternatives available for far less.

tl;dr - Douchebags and their money are easily separated.

CuriousPasserby's picture

Because then you hedge there is a cost, and if it went way down you would not have as big a loss as an index fund?

DCFusor's picture

Me, too, but the vice is versa.  When things are going in ways that hedge funds do well, you should be an index fund manager in the same position.  Perspective, man!


Mugatu's picture

Can't wait for Monday!  Cue the deer! Cue the deer!

Get ready for: 2008 - The Sequel

Luke 21's picture

You mean, you can't wait for the massive rally next week.

johnu78's picture

The only rally I want to see is about 2 million protestors in front of Wall Street. Now that's something I'd pay to see!



JPM Hater001's picture

Again with the Wall Street this and Wall Street Protest that!

Damnit People.  Who let the new guy in?

Hope for 2 Million protesting infront of the Federal Reserve Bank of New York.

jcaz's picture

Naw, I enjoy them- it's always funny to watch them try to answer the interview questions- "What do you stand for?"  Crickets.....

JPM Hater001's picture

Actually they have a very specific list of what they are against.  Thinking.

Now Billie Meier...he was a thinker


RiverRoad's picture

There's a rally going on all right.  But it's a silent rally:  the sound of millions of wallets folding shut.  John Q. Public has walked; look at the volumes.  How many times can you screw the same guy over?

ToNYC's picture

Last time the little guy had a chance was as a SOES bandit in 1999.

Wixard's picture

I wouldn't be surprised if we have a big bounce claiming that the euro can be saved. They can sneak it past america if it's stealth. 


Just hide the information in something longer than a 30 second clip. 

Unprepared's picture

They can always apply for a bank charter.

buzzsaw99's picture

US households directly own 33% of the domestic equity market...

US billionaires directly own 33% of the domestic equity market...

Fixed it.

cossack55's picture

Hedge fund investors normally shop at WalMart around midnite.

sitenine's picture

At this point, I have serious doubts over whether or not many fund managers are as concerned any more about serving their customers over their own paychecks.

GeneMarchbanks's picture

You're a paranoid loon. -Jon Corzine

blunderdog's picture

There's no reason for managers to worry about customers anymore.  In principle, they were supposed to have fiduciary responsibility and thus be potentially prosecutable for negligence (or intentional fraud).

We don't enforce laws like that these days.  A fund-manager would have to be pretty stupid not to put his own enrichment at the top of the list of priorities.

Pretorian's picture

Is anyone reading news today "EU - US summit  on debt crisies " in Washington MOnday morning. 28th November. FED is bailing EU out.

sitenine's picture

Do you think this might also have something to do with the large increase of $88 billion swing in the weekly "other" deposit account with the Fed?


Curious story.  I can't find much info on it aside from ZH.

Caviar Emptor's picture

Top hedge funds = US .gov slush funds for PPT and other market 'operations' 


JPM Hater001's picture

What is so funny is these clowns are baffled at the results and havn't a clue how this has happened.  After all, they had all the best politicians with all the best insider Congressional Trade-looting of the American Public by socio-depreciable specimins of human excriment...but I digress.

I suppose the point is, if Keynes were here today I feel pretty sure even he would have looked around enough by now to say, "Yah, Dat idea iz fusked up."  Otherwise, Lemmings at the Hedge Funds are just doing what they really do best...Follow.

The rest of us are smart enough to know we are already at war.

Reese Bobby's picture

"Hedge Funds": The world's greatest compensation scam.  "A fool and his money..."

Wixard's picture

Don't forget the other great golden rule:


"He with the  barbarous relic makes all the rules" 

High Plains Drifter's picture


jim cramer explains how its done. remember. its not about the fundamentals.......who cares about the fundamentals. it all about greed and lying and stealing and above all else , survival.....

PulauHantu29's picture

Bill Bonner (and many others) write the only people who profit with hedge funds are the managers. I remember Amaranth, the largest hedge fund collapse in history:



RiverRoad's picture

Re #10...."New constituents:"........IBM!!!  Uncle Warren's been driving that one up royally.  Hang onto your hats when these guys run for the exits.

DCFusor's picture

Or perhaps, "hang onto your short positions?".

economics1996's picture

The parasite class (government thugs) needs to clear the fuck out of the way.  



High Plains Drifter's picture


Far-Reaching Case

“Nobody in the legislative history of this country thought about a case like this,” Lewis Kruger, a lawyer for a group of customers, argued before Glenn today. “This case may determine whether there is a commodities market in the future. I have great concern about what’s going to happen in this industry. This is a far-reaching case and it needs to have an imaginative resolution.”

perhaps this case will have far reaching implications. nobody will ever allow someone else to hold their money....so what will happen? they must repay dollar for dollar or commodities futures trading will drastically change somehow....one would think......

falak pema's picture

In case of a 30% to 40% market down turn; not only will the banks burn but the HF will be obliterated for the most. Especially as the paradigm change required will turn the market illiquid for a long time. No leverage, no HFs.

Additionally the markets wiil die, as all major economies will move to central command mode; making HFs arbitrage redundant, meaningless,  for oligopoly type peer to peer transactions. As for entrepreneurial activity, it will require funding by venture capital investors, whether they be direct public contribution, cooperative capitalism or state subsidised, they won't involve going to a broken and dried up classical capital market. We will need smaller, decentralised, specialised new markets, more transparent, on Internet, to replace current huge, opaque and Oligarchy controlled ones.

Dollar Bill Hiccup's picture

Hooray for the Oligarchs and Command and Control! Where's my Marx ... he's lying around here somewhere.

Walmart is the Opiate of the Masses, or something like that.

mjk0259's picture

Since many of them are using leverage, they should be getting several times the market return just by buying an index fund...

orkoSvalbard's picture

smartmoneytracker.blogspot.com, portfolio up 20% since July. Learning a lot too. Price is right, too. Woot!

orkoSvalbard's picture

Seemed like an appropriate comment...