Exactly one month ago, when we learned that Goldman was looking to package its Hedge Fund VIP basket of stocks into an ETF we said, half jokingly, that we have discovered a "guaranteed way to make money: Short Goldman's "Hedge Fund VIP" ETF", adding that "with 5 of their Top 6 trades for 2016 already stopped out, and their recent heavy losses from swing-trading Gold, one might question the demand for an ETF that tracks Goldman Sachs' hedge fund research tips, but, as Bloomberg reports, David Kostin's "Hedge Fund Trend Monitor" report - tracking the 50 companies that matter most to hedge funds - is about to be launched."
But more importantly we said that given the dismal performance, "one can only imagine that creating this ETF enables Goldman Sachs' clients to offload huge blocks of their positions into a muppet-friendly investment vehicle that every Tom, Dick, and Day-Trader will scoop up. For now the ETF has not been assigned a ticker symbol - may we suggest 'LOSE' or 'MUPT' or 'FUKT'?"
And then, just for good measure, we added that "this being Goldman - the company which brought you the Made for Shorting Abacus CDO - the guaranteed way to make money with this ETF would be to short it."
It wasn't a joke.
While already a month ago this Hedge Fund VIP basket was imploding as we showed at the time...
... since then things have gone from terrible to absolutely abysmal, and as of this moment the GSTHHVIP index which tracks the performance of these "most popular" among hedge fund stocks, has never been lower despite the dramatic rebound in the broad market!
So yes, anyone who shorted this index one month ago as we suggested, has made money. Unfortunately for Goldman's hedge fund clients, the "basket" is still not available in ETF format, which means hedge funds are forced to pass these hot potato stocks among each other.
It also explains why while the most popular hedge fund stock basket has never done worse, its alternative, the least concentrated basket of stocks has never done better.
In other words, and as we also said last time around, the only winning trade is to do precisely the opposite of what the hedge funds are doing, none of whom have any clue as to what is going in this market anymore.
For those curious which stocks make up Goldman's "hedge fund VIP basket", so they can avoid them of course, here they are again.
Unfortunately for hedge funds it is too late to unwind exposure at this point, which is why despite the market rebounding to just modestly green on the year, most hedge funds remain deep in the red, because as Kostin puts it "the violent factor reversals have offset most efforts to generate alpha." More:
Mutual funds and hedge funds have faced a difficult start to the year. High return dispersion is typically associated with increased stock-picking opportunities but the violent factor reversals have offset most efforts to generate alpha. Large-cap core mutual funds and hedge funds have lagged the S&P 500 YTD by 90 bp and 280 bp, respectively. 32% of large core funds has outpaced the S&P 500 YTD, close to the 10-year average of 33%. Large-cap growth funds have fared the worst with only 9% of funds beating the Russell 1000 Growth index so far in 2016.
Unfavorable stock selection has also hurt fund performance. Our basket the most popular hedge fund positions (GSTHHVIP) has lagged our very important short position basket (GSTHVISP) by 700 bp YTD (-5% vs. 2%). Similarly, our mutual fund overweights basket (GSTHMFOW) has trailed mutual fund underweights (GSTHMFUW) by 820 bp (-5% vs. 4%).
Mutual funds and hedge funds favor high growth, consumer-facing technology stocks such as Facebook (FB) and Alphabet (GOOGL). Eleven stocks appear in both our mutual fund overweights and popular hedge fund positions baskets. The median return of the 11 stocks was 19% during 2015 compared with -10% YTD. The median stock has higher expected 2016 sales growth (16% vs. 3%) and EPS growth (17% vs. 6%) vs. the market but a higher valuation (forward P/E of 19x vs. 17x for S&P 500).
Said simply, what the above means is that in their scramble to save the stock market, central banks who succeeded in generated the latest artificial rebound across global stock markets, have once again crushed hedge funds, whose hedges were only just starting to generate alpha before they were all eviscerated in the latest unprecedented short squeeze/stock buyback ramp.
All of this goes back to a point we made back in 2011: why pay hedge funds 2 and 20 for the "privilege" of underperforming the market? After all, the "market" is so manipulated now, it can't withstand even a modest 10% correction before global, coordinated central bank intervention is unleashed as has been the case over the past month. In this environment, why hedge? Yes, short hedges may work for a while, but then it is these most shorted stocks that will soar and crush the most hedge funds in the process.
Finally, if hedging the loss of central bank credibility, one can not possibly do that using stocks as an unwind of the "central-bank model" by implication means the total obliteration of every form of existing capital markets; in fact any asset that has counterparty risk would be annihilated. As such, the only assets worth holding on to would be those with zero counterparty risk... such as silly pet rocks, which for some odd reason have preserved their value for over 5,000 years...