Overconcentration and overcrowding of hedge fund portfolios seems to be a trend, according to the newest Goldman Sachs Hedge Fund Trend Monitor. Currently, an average hedge fund has about 70% of its portfolio invested in its top 10 positions. It has not reached its peak from 2018 when that figure went closer to 75%, but it is getting close.
The issue of overcrowding, or overlapping of investments in the same companies and sectors is another hot topic. This trend reached its peak in 2016 and 2018 after which it cooled down. However, that approach was never completely rejected by hedge funds, and it always came back on top.
One of the reasons for this overlapping is investing in the smaller number of companies concentrated in the AI sector. Everyone is trying to get their hands on these stocks like they will continue to grow indefinitely, think stocks like Nvidia, which is currently trading at around $2.7 trillion market cap, vs a tiny fraction of that just a few years ago.
Combined with the factors above, hedge fund portfolios experienced decreased turnover in the last quarter. This can come as a result of a hedge fund strategy that is opting for keeping long-term positions but is also connected with both of the issues mentioned before.
Hedge funds are massively investing in AI, both the big players, and the newcomers, and are still waiting to see how much they can rise. The next bet is on the companies that are representing the AI infrastructure elements of the industry.
The tech sector remained a favorite amongst hedge funds with 17.9% total net exposure. However, it remained the largest underweight with 913 base points when compared to the Russell 3000 index.
Next in line is the Health sector with a total net weight of 15.8%. It is the largest overweight sector relative to Russell 3000 with 375 base points, while it managed to gain an additional 101 base points.
Consumer Discretionary sector with its 11.9% is in fourth place, while it managed to lose 110 base points.
For more on how hedge funds are investing check out our letters database.
