Hedge funds are bullish on their individual stocks, but bearish on the overall market. In the first quarter, they sold banks and technology stocks, while adding to defensive sectors like health care.
Those are the highlights from a
Goldman Sachs
analysis of holdings of 740 hedge funds worth a combined $2.2 trillion at the end of March. Within 45 days of the end of each quarter, hedge funds must report their portfolio holdings to the Securities and Exchange Commission on a regulatory form known as a 13-F.
Collectively, hedge fund managers appear to be betting on 2023 being a so-called “stockpickers’ market,” per data from Goldman Sachs.
“Hedge funds have little conviction in market direction but high confidence in their stock picks, especially in long portfolios,” wrote Goldman Sachs strategist Ben Snider. “…Hedge funds carry large net short positions in equity futures and [exchange-traded funds,] but short interest for the typical stock remains close to the historic low at just 1.7% of float cap.”
It has been a top-heavy market so far this year, and hedge funds have participated. Their most popular positions are
Microsoft
(ticker: MSFT),
Amazon.com
(AMZN),
Meta Platforms
(META),
Alphabet
(GOOGL),
Uber Technologies
(UBER),
Apple
(AAPL), and
Nvidia
(NVDA). Those make up the top of Goldman Sachs’ “Hedge Fund VIP” basket, which includes the stocks that are most frequently found in hedge funds’ top-10 holdings.
On a sector level, hedge funds added to their defensive exposure in the first quarter. Healthcare—which was already the group’s largest overweight relative to the Russell 3000 index of most U.S. stocks—saw the biggest increase in holdings, followed by consumer staples and utilities.
Hedge funds had a collective 25.2% of their portfolios in healthcare stocks at the end of March, versus the Russell 3000’s 13.5% weight in the sector. Despite the first-quarter inflows, utilities and consumer staples remain modest underweights relative to the index. Other overweights include cyclical industrials and materials stocks, but those make up a relatively small percentage of both the index and hedge fund portfolios.
Tech stocks were hedge funds’ greatest underweight relative to the index, at 13.9% versus 24.1%, respectively. The group was the biggest source of selling in the first quarter. Financials were the second-largest underweight to the Russell 3000, with regional banks also seeing outflows during the sector’s turmoil.
Hedge funds saw some bargains in the financial sector in the first quarter, however.
Charles Schwab
(SCHW),
BlackRock
(BLK), and
JPMorgan Chase
(JPM) were among the top new buys in the first quarter—judged by the increase in the number of hedge funds owning the stock.
Other top buys among hedge funds in the first three months of 2023—a group Goldman calls the “Rising Stars”—were
National Instruments
(NATI),
Walmart
(WMT),
GE Healthcare Technologies
(GEHC),
Honeywell International
(HON),
Norfolk Southern
(NSC),
Estée Lauder Companies
(EL), and
Pfizer
(PFE). Since 2002, the stocks in that basket have gone on to beat their sector by an average of 0.59 percentage point in the following quarter, according to Goldman Sachs.
The reverse trade has also worked: Stocks with the greatest decline in the number of hedge-fund shareholders in a quarter have lagged behind their sector peers by 0.60 percentage point over the next quarter. In the first quarter, the list of “Falling Stars” included
Qualcomm
(QCOM),
DXC Technol
ogy (DXC),
Textron
(TXT),
Bunge
(BG),
Juniper Networks
(JNPR),
Southwest Airlines
(LUV), Welltower (WELL),
Dominion Energy
(D),
Vertex Pharmaceuticals
(VRTX), and
Cisco Systems
(CSCO).
Write to Nicholas Jasinski at nicholas.jasinski@barrons.com
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