While retail margin debt has eclipsed new highs multiple times this year, it seems hedge funds are holding steady. The latest from Goldman Sachs Hedge Fund Trend Monitor noted that risk appetite of hedge funds stayed within the same frame in the past two quarters.
Not chasing the market?
The net long exposure, as estimated by Goldman Sachs Group Inc (NYSE:GS), was at 51% at the beginning of the fourth quarter, still high but steady. This is the ratio of net equity exposure to total long portfolio size, which reached 53% in the first quarter, breaking a previous record of 52% in 2007. This would imply that hedge funds are showing some restraint in chasing high returns. However this risk-averse picture is not supported by reality, where we see hedge funds betting on risky trades to make quick profits.
The vast majority of players in the hedge fund industry are either churning out absolute losses or are underperforming the benchmark indices. Goldman Sachs notes that 20% of hedge funds have reported negative returns whereas only 5% have managed to beat the corresponding 25% return on S&P 500 (INDEXSP:.INX) in the last three quarters.
Hedge funds account for the bulk of short exposure
Furthermore the report notes that nearly 85% of short positions disclosed in ETFs and single stock names are held by hedge funds only. As short interest has grown in stocks, total assets of the industry have also grown in parallel.
According to the findings of this report, hedge funds lay claim to $545 billion of the $641 billion short positions filed in single-stock, ETF and market index. While hedge funds have kept more or less the same level of exposure in different sectors, they remain the most overweight on Consumer Discretionary and the most underweight in Information Technology, Consumer Staples, and Financials relative to the Russell 3000.
Among the S&P 500 companies, the highest dollar value of short interest stands steady at Intel Corporation (NASDAQ:INTC) where $6 billion of equity is held in bearish bets. Short interest accelerated in salesforce.com, inc. (NYSE:CRM) to 9% of equity which amounts to $2.7 billion in dollar value. Carl Icahn’s activist holding also experienced an increase in short activity: total short interest was at 7% of equity cap at the end of third quarter.
Netflix, Inc. (NASDAQ:NFLX) is one of the most concentrated holdings, with 20% of equity owned by hedge funds. Short interest in the broadcasting company is now at 9% of equity. Chipotle Mexican Grill, Inc. (NYSE:CMG), a stock that David Einhorn is still shorting, has 9% of equity cap held in short bets.