Hedge Funds Underperform The S&P For The 7th Year In A Row: Here Are Their Top Holdings

Maybe one day investors, or at least the 1%-ers, will finally grasp that in a centrally-planned world in which the central banks themselves assure that there is "no risk", there is also no point in paying billionaire hedge fund managers 2 and 20 to "hedge" away risk, since there simply is none left (at least until central bankers lose control, at which point it will be too late to hedge assets as the fiat system itself will implode).

In fact, the only strategy that does seem to work in this "NIRP normal" is to buy the stocks most shorted by the hedge funds community as sooner or later they soar on yet another inevitable short squeeze, as we first suggested back in 2012.

However, since most people are too lazy to do any work (this includes hedge funds themselves), and would rather piggy back on other people's work (such as the rating agencies back in 2005-2007) that day is still far away.

So for the time being, this is how, through February 20, the US hedge fund universe of the "smartest money" around is doing. According to Goldman, "the average hedge fund has returned 1% YTD after lagging the S&P 500 by 11 pp in 2014 (3% vs. 14%). Our VIP basket of the most popular long positions (Bloomberg: GSTHHVIP) has gained 0.2% YTD despite the strong performance of Apple, which remains the most popular hedge fund stock and continues to rise in size and popularity. Funds entered 2015 with record net long exposure of 57% and overweight positions in the Energy sector."

The key notables from the above excerpt: after trailing the S&P for 6 years in a row, the 7th is so far not proving to be the charm.


The "hedge fund hotel" underperformance is taking place despite hedge fund long exposure rising to 57%, an all time high, as shorting is no longer either an art nor a science, but merely long forgotten:


Perhaps even more troubling is that in their confusion how to generate alpha, all hedge fund managers do is participate in "hedge fund idea dinners" which has resulted in a surge in concentration to a level not seen since Lehman of the most prominent hedge fund positions. According to Goldman: "Hedge fund returns are highly dependent on the performance of a few key stocks. The typical hedge fund has an average of 65% of its long-equity assets invested in its 10 largest positions compared with 32% for the typical large-cap mutual fund, 22% for the average small-cap mutual fund, 17% for the S&P 500 and just 3% for the Russell 2000 Index."

In other words it is no longer a "hedge" fund: it is a "scrambling to come up with any original ideas here" fund.


And with near record high concentration of ideas and near record low creativity, which stock do most hedge funds love above all? What else, but AAPL. More Goldman:

Apple reigns undisputed as the most popular hedge fund stock. Nearly one in five of the 688 fundamentally-driven hedge funds in our sample own Apple; 12% hold it as a top 10 position. AAPL is the top stock in our VIP list of most popular hedge fund long positions (Bloomberg: GSTHHVIP) for the second straight quarter and has ranked among the top five VIPs for more than six years. Although interest in the stock is resurgent, at its peak popularity in 2012 nearly 33% of funds held Apple and 20% held it as a top position.


Its size and popularity means Apple will be a key driver of hedge fund returns as well as broad US equity performance and earnings growth. Apple constitutes 4% of S&P 500 market cap and 5% of consensus 2015 EPS. Given its 17% YTD return, the stock has contributed 61 bp of the S&P 500 2.3% YTD return, or 27% of the total.

And since the bulk of the AAPL upside is purely a result of financial engineering and bets that the company will issue more debt and use the proceeds to buyback stock, it is somewhat ironic that the future of equity hedge funds compensation is in the hands of debt investors, whose generosity when it comes to the next round of AAPL bond issuance, and the next, and the one after, is what will ultimately determine not just the average return of hedge funds in 2015, but of the S&P500 itself.

Which brings us to the question on everybody's mind:

what are the most widely held stocks by "hedge" funds? Here is the answer:


But why bother with the longs? After all since 2012 it has been the most shorted names that have outperformed the hedge fund hotel, as has been duly noted before.  To be sure, Goldman's "Very Important Short" basket has outperformed not only the "Long VIP" Basket, but the S&P500 itself!


As such it continues to be far more useful, not to mention profitable, to focus not on what hedge funds are most long, but going long the most shorted names for yet another year.

Here is the full list: