Hedge funds took a beating during the third quarter thanks to the exceedingly poor performances posted by some of their biggest performances. Health Care led the way, accounting for 70% of the underperformance of Goldman Sachs’ Hedge Fund Very Important Position basket since August. The firm released the latest edition of its “Hedge Fund Trend Monitor” report on Friday.

Hedge funds lag the S&P 500

According to analyst Ben Snider and his team, the average hedge fund has so far returned -2% this year, underperforming the S&P 500 Index‘s 3% gain. In fact, the carnage was so bad that over the three months from August to October, the favorite hedge fund positions (as measured by Goldman Sachs) posted their worst three-month relative return since 2008.

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The Goldman team estimates that in aggregate, hedge funds are running 51% net long right now, compared to the 57% net long they were running during the first quarter of the year.

Favorite hedge fund positions prove costly

Goldman’s basket of very important positions includes the 50 stocks that are seen the most often in the top ten holdings of “fundamentally-driven hedge fund portfolios.” Last year, the basket outperformed the S&P 500 by 265 basis points. The basket also outperformed the index in 66% of the quarters since 2001. This year, however, the basket underperformed the index by 537 basis points.

[drizzle]Between July and October, Snider and team said their list of favorite hedge fund positions underperformed the S&P 500 by 720 basis points between July and October, declining by 8% compared to the index’s 1% decline in the same time frame. The analysts said Valeant Pharmaceuticals was the biggest drag on the popular positions.

Hedge funds continue to stagger

The Goldman team said aggregate hedge fund returns entered negative territory (with their 2% decline) during the August market correction, and they have yet to recover. Snider reports that event-driven hedge funds have seen the worst performance out of all hedge funds, with the typical fund declining 6% so far year to date.

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Among the new favorite positions Snider and team noted were PayPal, General Electric, McDonald’s, Baidu, and Mylan.  Here’s a look at the turnover for their very important positions basket:

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And here is the full list of the 50 stocks that appeared the most often in the top ten holdings of hedge funds during the third quarter:

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All graphs and charts in this article are courtesy Goldman Sachs.

And finally, one anecdotal chart which shows how much the hot positions have hurt many hedge funds… You will notice many familiar names among worst performers via HSBC Hedge Weekly

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