Below is some of the latest from Goldman’s hedge fund monitor for Q413 (hot off the press). Although there are different ways to measure it, it appears that General Motors Company (NYSE:GM) is now the favorite stock among hedge funds, overtaking GOOG or AIG. Below is a summary from the Goldman hedge fund monitor followed by two charts which focus on the top holdings. We will have more coverage on other aspects of the report on Friday.
David Kostin of Goldman Sachs
This Hedge Fund Trend Monitor analyzes 778 hedge funds with $1.8 trillion of gross equity positions ($1.2 trillion long and $570 billion short). Our analysis of hedge fund positions at the start of 1Q 2014 is based on 13-F filings as of February 14, 2014. We list 9 conclusions below.
1. VERY IMPORTANT POSITIONS: Our Hedge Fund VIP list (Bloomberg: <GSTHHVIP>) continues to outperform in 2014 following 900 bp of excess return in 2013 (41% vs. 32%). The basket contains the 50 stocks that appear most frequently among the top 10 holdings of fundamentally-driven hedge fund portfolios. The VIP list has returned 1.2% YTD,
140 bp better than the S&P 500. Top 5 stocks: General Motors Company (NYSE:GM), Google Inc (NASDAQ:GOOG), Apple Inc. (NASDAQ:AAPL), AIG, and HTZ. Turnover in our VIP basket was below its historical average, with 13 new constituents: AAL, AGO, COLE, ENDP, GILD, HCA, LAMR, LBTYK, NRF, OCN, STZ, TMUS, and VC.
2. ACTIVISM: The number of activist campaigns has risen by 23% during the past two years but remains below the prior peak of 2007 and 2008. We expect activism to continue in 2014, with 25 campaigns already launched YTD. Activist hedge funds have posted returns of 40% during the past two years compared with a 23% return for the typical equity hedge fund. Three of our VIP constituents have open campaigns: EBAY, YHOO, TWC.
3. TURNOVER: Turnover of hedge fund positions continues to drop, falling to a record low of 28% in 4Q as fund portfolios remain static. The turnover of the largest quartile of holdings also fell to an all-time low of 14%. The average fund holds 63% of long assets in its top 10 positions compared with 31% for the average mutual fund. See page 20.
4. RISK: We estimate hedge funds in aggregate operate 54% net long at the portfolio level, the highest ratio in at least a decade. Risk appetite by this metric dipped modestly in mid-2013 but climbed to new highs along with the market to start 2014.
5. CONCENTRATION: Our basket of the 20 “Most Concentrated” hedge fund stocks (Bloomberg ticker: <GSTHHFHI>) continues to outperform the S&P 500. We define “concentration” as the share of equity cap owned by hedge funds. Since 2001, the strategy has outperformed the S&P 500 71% of the time by an average of 262 bp per quarter. Following 1700 bp of outperformance in 2013, the basket continues to lead the S&P 500 in 2014 (+1.8% vs. -0.3%). Four new constituents: ALLE, APD, QEP, and CVC. See page 12.
6. PERFORMANCE: Hedge funds returned an average of -0.5% YTD through January, with 82% of funds outperforming the S&P 500 (-3.5%). Last year the typical fund posted a 9.8% return compared with 32% for the S&P 500 and average large-cap core mutual fund.
7. ETFs: Hedge funds hold large positions in EM equity, volatility, gold, and bond ETFs.
Hedge funds generally use ETFs more as a hedging tool than directional investment vehicles, and most of these positions reflect net shorts. ETFs represent 3% of long holdings, the lowest since 1Q 2010.
8. SHORT INTEREST: The S&P 500 short interest ratio reached 3 days to cover in 4Q 2013, the highest since mid-2007. Aggregate dollars of short interest outstanding hit record levels in late 2013 as the S&P 500 reached record highs. The market rally combined with low trading volumes drove the S&P 500 short interest ratio to a six-year high. Page 15.
9. VERY IMPORTANT SHORT POSITIONS: Our Hedge Fund Very Important Short Position basket (<GSTHVISP>) provides a more effective short than the S&P 500. The basket contains the 50 S&P 500 stocks with the highest total dollar value of short interest outstanding that are not in our VIP long basket. Our long VIP/short VISP pair trade has mirrored the HFR Equity Hedge Index with an average quarterly return of 148 bp vs. 141 bp since 2001, but with a higher Sharpe Ratio (0.46 vs. 0.27).
And the largest hedge funds