Positioning and technicals matter a lot towards the end of the year, so we read Goldman Sachs’s latest hedge fund monitor report with interest. It seems hedgies are playing hard defence in the past few weeks of 2022.
First of all, it will surprise few that it’s been a no-good year for hedge fund hotels like Netflix, Amazon and a motley crew of Chinese ADRs, and that has inflicted some nasty losses on many big players.
Goldman’s Hedge Fund VIP List of stocks that appear most frequently in the top-10 holdings of the 786 hedge fund with $1.5tn of long equity positions the investment bank tracks has fallen 29 per cent so far this year, even worse than the S&P 500’s 16 per cent loss.
Even after a slight bounce in the third quarter, 2022 is on track to be the worst relative year of stockpicking performance in the 20-year history of the list, and the second-worst absolute year (after the financial crisis, natch).
Popular hedge fund shorts have fallen 11 per cent this year. In other words, their stockpicking has underperformed on the negative side as well, which is . . . not great given the market environment.
But this has helped pare the performance of equity hedge funds tracked by Goldman to a 12 per cent loss; better than the overall market and long-only mutual funds (which have fallen 14 per cent on average).
A 9 per cent gain by macro funds (and we assume CTAs) have helped pare the average return of hedge funds monitored by Goldman to a 5 per cent drawdown so far in 2022.
The result is that hedge funds as a group have markedly ratcheted back leverage, hunkered down in a smaller, more concentrated group of stocks they love, and pared their overall equity market exposure to lows last seen at the depths of the global financial crisis.
Goldman’s prime brokerage unit estimates that while gross exposure remains a bit above average, net leverage has fallen sharply this year (especially for fundamental long-short equity hedge funds).
At the same time, crowding has remained high, as hedge funds increasingly hold many of the same positions, and concentration — how much weight the top 10 holdings have in the median hedge fund portfolio — has jumped sharply.
Portfolio turnover also fell to record lows in the third quarter, further underscoring the whole “hunker down and pray” vibe.
The overall effect is that hedge fund sensitivity to movements of the US stocks — basically a good measure of their net equity market exposure — is at the lowest level since early 2009.
We’re unsure of the best way to read all this, but it could be that positioning is so light that if the equity market does stage a big bounce from here, it could suck a lot of hedge funds back in very quickly? Cash balances among mutual funds are also pretty chunky after all.
At the same time, that level of concentration and crowding could become dangerous if there are any big setbacks. And to be fair, stocking up on stonks doesn’t exactly feel like a safe bet given the prevailing economic outlook . . .