What is working best, however, is not the long / short funds, but Goldman’s basket of VIP long trades and VIP short trades, which is up 4% year to date mostly on the strength of the short position.
Failure to capture April move higher
The report noted that funds kept pace with the stock market through March, but then lowered exposure in April before the S&P rebounded, resulting in the divergent returns. “Poor equity hedge fund performance is unsurprising given historically low return dispersion,” the report noted. Return dispersion is trolling near historic lows for the S&P in general but more specifically this is the case for the consumer discretionary stocks, which presents a problem for funds.
Funds hold a high percentage of consumer discretionary stocks and a low percentage of utilities, while utilities delivered the highest performance and consumer discretionary delivered the lowest performance.
In regards to the largest hedge fund shorts, that list included Gilead Sciences, with $7.6 billion short interest, followed by AT&T Inc. (NYSE:T) at $6.6 billion short. The most shorted list included a diverse group of stocks, from Exon and Intel Corporation (NASDAQ:INTC) to Visa Inc (NYSE:V), The Walt Disney Company (NYSE:DIS) and Johnson & Johnson (NYSE:JNJ). Hedge funds account for 85 percent of all short positions, Goldman estimated, and the growth in short interest in the stock market correlates to the growth of hedge fund assets under management.
Hedge fund concentration strategy
An interesting trend Goldman tracks is the hedge fund concentration strategy. “The strategy of buying the 20 most concentrated stocks has a strong track record over more than 10 years,” the report noted. “Since 2001, the strategy has outperformed the market 69% of the time by an average of 254 bp per quarter (not annualized).”
The concentration strategy, however, works in an up trending market featuring strong price persistence, but doesn’t perform as well during choppy markets – a characteristic consistent with momentum-based trend following strategies as well.