Goldman Sachs’ ‘Hedge Fund Trend Monitor,’ issued August 20, 2014 by analysts Ben Sneider, David Kostin, Amanda Sneider, Elad Pashtan and Brett Sanchez, surveys 775 hedge funds that held gross positions aggregating $1.9 trillion at the commencement of Q3 2014.

Year-to-date, hedge funds (up just 1%) are still trailing the S&P 500 (INDEXSP:.INX) (+7%) though returns have recovered somewhat from the market sell-off seen during Q1.

Hedge Funds comparative performance

Interestingly, as seen in the above chart of performance by strategy, hedge fund performance as measured by the Composite Hedge Fund Index is far below returns achieved by Emerging Markets, Gold, 10Y Treasuries and even Large Cap Mutual Funds.

Hedge funds obsess with the Consumer Discretionary Sector

“Hedge funds continue to allocate roughly 20% of assets to the Consumer Discretionary sector,” observe the analysts.  “However, the sector has returned just 1% YTD, worst among S&P 500 sectors, and registered low return dispersion vs. history.”

This factor has marred returns for the hedge funds, apart from poor market timing and short position outperformance.

Hedge funds ytd

The consumer discretionary sector has been underperforming after a sustained period of providing solid returns. Though economic news has given the picture of a recovering economy, it appears that the consumer is wary of what the future holds in terms of employment prospects and income generation – one reason why spending is still muted, and reflecting on consumer discretionary stocks. Increasing speculation of a rate hike by the Fed that would signal the end of a long period of easy money may also be impacting consumer psychology.

Key sector allocations

“Consumer Discretionary and Consumer Staples are consistently the largest over- and underweight sector positions relative to the Russell 3000 (INDEXRUSSELL:RUA), and those biases remained this quarter,” observes the note by Goldman Sachs, referring to the table 19 below.

(Note in the foregoing Performance table of S&P 500 sectors that YTD, the Consumer Discretionary sector was the worst performing sector (+1%) while Consumer Staples (+12%) was one of the top three performing sectors)

Hedge funds sector weights

Hedge funds followed the market into the Health Care Sector – which was the best performing sector YTD in the Russell 3000 Index – with weightage increasing by 132 bps during the quarter under review.

However, though Russell 3000 IT and Utility sectors showed strong YTD returns of 10.0% and 11.8% respectively, hedge funds trimmed allocations in these sectors.