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Takeaway #1: The Performance of Popular Large Cap Stocks in Hedge Funds Has Been Weakening Again
dollar amount owned. In late:
The weakness of this basket so far in 3Q22, when just 25% of the names on this list have outperformed the S&P 500, is something we are keeping a close eye on as it may be signaling that stocks generally are poised to experience another bout of volatility in coming months.
Performance trends are also starting to weaken again for another basket of popular Hedge Fund holdings – the Hotels, which captures the most popular stocks in terms of the percent of market cap owned by hedge funds.
It’s worth noting that most of the Hot Dogs saw hedge fund ownership fall in 2Q.
Additionally, our Rockets screen – S&P 500 names which saw the biggest increases in hedge fund ownership during 2Q – has been mostly underperforming so far in 3Q.
Trends in our Submarines screen – S&P 500 names which saw the biggest declines in hedge fund ownership during 2Q – have been much better with more than half outperforming so far in 3Q. A number of bellwether internet and semis appeared on this latest iteration of the Submarines. Unfortunately, the sellers were not able to capture recent Submarines’ outperformance, something that we think speaks to the frustration of many hedge fund investors recently.
Moving on to Takeaway #2: Hedge Funds Began 3Q22 at Post GFC High OW’s To Commodities/Cyclicals, Below Peak Overweights to Defensives, Underweights in Secular Growth
Zooming out and looking at bigger picture sector allocations, one thing that jumped out at us was that generally speaking, hedge funds began 3Q22 at post GFC highs in terms of their overweights to cyclical and commodity sectors (a key component of the Value trade), with overweights that remain below peak to defensives, and with underweights to secular growth. This tells us the longer-term opportunity in terms of positioning remains in the growth part of the market.
Digging down a level deeper to sectors…
On the cyclical/commodity side, the improvement in positioning was driven by increased overweights to Industrials, narrowing underweights to Financials, flat positioning in Energy (which is essentially neutral), and offset a sharp decline in overweights to Materials.
to narrow and remain near mid:
On the secular growth side, Communication Services and Consumer Discretionary positioning didn’t change much with the former essentially neutral and the latter slightly overweight (but near their post GFC lows), while Tech underweights remained deep.
Digging down another level deeper to industries… a few groups jumped out.
Biotech remains heavily overweighted but below past highs. There’s no clear signal here to us but we do find it interesting.
Software & IT Services OW has dropped sharply and is nearly market weight again / approaching past lows – which we see as a constructive signal. Software & IT Services positioning doesn’t usually get much worse than this. Semis underweights remain deep but narrowed in 2Q – which we see as constructive signals for these bellwether groups.
This was also the case for Interactive Media…..
….and Internet Retail.
Household Durables remains a slight overweight but at the low end of its range – another constructive signal for a beaten down group which contains Homebuilders.
Within Staples, Beverages positioning appears to have peaked, while Food & Staples Retailing positioning began the quarter at peak levels, and Food Products positioning made a rare pivot into overweight territory – all negative signals in our view though Food hasn’t peaked quite yet.
ificantly but isn’t back to:
Wrapping up with Takeaway #3: The Performance of Popular Small Cap Stocks in Hedge Funds Has Stabilized
e of the most popular Russell:
It’s worth noting that our Hedge Fund Puppies list which captures the most popular Russell 2000 stocks in hedge funds in terms of dollar value had a number of takeouts (we don’t screen these out in our process as a matter of routine). But among other names on the list, nearly half are outperforming in 3Q so far and nearly three quarters are outperforming for the year.
ures the most popular Russell:
That’s all for now. Thanks for listening. And be sure to check out our sister podcast RBC’s Industries in Motion with thoughts on specific sectors from RBC’s team of equity analysts.
