A recent report from Goldman Sachs showed that “hedge fund crowding” hit a new record in 2023. Hedge funds “went all-in” on the ‘Magnificent Seven’ and the average fund now holds 70% of its long positions in just 10 stocks.
How is that working out? GVIP is an ETF that invests in the stocks that appear most frequently among the top hedge fund holdings. GVIP has dramatically trailed the NASDAQ 100 index by more than 100% since its inception in 2016. And it did so while taking on greater risk.
Individual investors exhibit the same tendency for crowded trades. They chase hot stocks and funds to increase returns. Results mimic those of hedge funds. The average equity fund investor has underperformed the very funds into which they invest by more than 3% per year.
This consistently detrimental behavior is entrenched in the mistaken belief that the best way to outperform is to take on additional risk.
Time for a wake-up call. The opposite is true: Reduced risk = increased returns.
It takes a 50% return to recover from a 33% loss. If the loss is reduced to 25%, that same 50% recovery produces 12% in new profits. And the benefits don’t stop at increased returns. They include:
- Mitigated Sequence of Return Risk
- Reduced anxiety and increased ability to maintain investments
- More money in retirement
There are wrong ways to reduce risk. The crowd preaches the accepted wisdom that includes allocating away from equities into fixed income, capping upside returns with the sale of call options and attempting to market time.
Don’t get crushed in the crowd. Gift your clients more money in retirement this holiday season. Let us show you how Brandywine’s innovation of Risk Replacement can fulfill the promise of reduced risk = increased returns.
An example of the benefits of Risk Replacement. This is the actual performance of Brandywine’s Large Cap Strategy since the interim equity market peak in July.
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