Year to date, the average U.S. long/ short equity hedge fund has eked out a 1% return despite the market turmoil on the back of alpha on both the long and short sides. Goldman Sachs’ basket of the most popular long positions among hedge funds is up 6% year to date, with popular longs outperforming concentrated shorts in the majority of sectors.
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Eking out a positive return
According to Goldman Sachs’ latest “Hedge Fund Trend Monitor,” solid stock picking has enabled long/ short hedge funds to maintain a slightly positive return in spite of the volatility. The S&P 500 is also up 1%, underperforming Goldman’s basket of the most popular stocks.
Amid this year’s volatility, hedge funds have been boosting their shorts in both exchange-traded funds and single stocks, with ETF shorts rising to $218 billion at the beginning of Q2 and single-stock shorts rising to $948 billion.
In fact, this is the first time since the short squeeze in 2021 that short interest in the median S&P 500 stock ranks higher than the long-term average, increasing to 2.3% of the float from 1.8% in December.
Gross leverage reaches new heights
The end result of this dynamic is that gross leverage among hedge funds soared to a new record, although net leverage remains under its February high. Gross leverage among fundamental long/ short equity hedge funds now ranks in the 100th percentile, while net leverage stands in the 16th percentile versus the last five years.
According to Goldman, the only two sectors where the median stock is seeing meaningfully below-average short interest as a share of its float relative to the last three decades are financials and information technology.
Still in love with mega caps
Unsurprisingly, the mega caps remain the most popular long positions among hedge funds, with Amazon, Meta Platforms, Microsoft, NVIDIA and Alphabet holding the top spots. Goldman’s basket of the most popular longs has outperformed the S&P 500 in 59% of quarters since 2001, with an average quarterly excess return of 51 basis points.
During the second quarter, 13 new stocks were added to the basket:
- ANSYS
- Apollo Global
- Bank of America
- IAC
- Juniper Networks
- JPMorgan
- Lam Research
- Micron Technology
- PG&E
- Charles Schwab
- Sea Ltd.
- TransDigm
- Tenet Healthcare
Hedge funds began the second quarter with the highest cyclical exposure relative to defensives since 2014. Unfortunately, that tilt served as a headwind during the first quarter, although it has thus far helped boost hedge fund returns in the latest quarter as cyclicals have outperformed defensives by 11%.
Artificial intelligence also remained a hot theme, with funds holding steady on their exposure to the theme despite the macro volatility.
Trimming the Magnificent Seven
Additionally, funds trimmed their positions on net in most of the Magnificent Seven as part of a wider unwinding of positions. Funds cut net positions the most in Microsoft, which earned a spot on Goldman’s “falling stars” list.
Except for Tesla, the Magnificent Seven remains atop the list of the most popular hedge fund stocks. However, hedge funds trimmed their exposures to the mega caps before the 12% rally that began at the beginning of Q2.
Cutting health care, adding info tech
Meanwhile, hedge funds slashed their net tilts to health care and added to information technology, consumer discretionary and industrials. According to Goldman Sachs, the rotation out of health care was concentrated in biopharma, with Bristol-Myers and Charles River Laboratories landing on the firm’s list of “falling stars.”
The firm reported that overweight tilts in industrials and consumer discretionary are approaching the largest positions in those sectors over the last 10 years. Within consumer discretionary, Floor & Decor, Lithia Motors, Tapestry, Wyndham Hotels & Resorts and Yum Brands entered Goldman’s list of “rising stars,” while Knight-Swift Transportation was added from industrials.
