Consumer Discretionary Leads Hedge Fund Inflows In Q2 by Andrew Birstingl, Research Analyst – FactSet

The 50 largest hedge funds increased their equity exposure by 0.3% in Q2 2016. This marked a turnaround from Q1 when equity exposure declined almost 7%. Six out of 10 GICS sectors experienced aggregate purchases, with the Consumer Discretionary and Consumer Staples sectors leading the inflows. On the opposite end, the Financials and Health Care groups saw the largest aggregate sales during the quarter.

Consumer Discretionary, Hedge Fund Inflows, Hedge Funds

Starwood Tops Purchases, Media and Food Up as Well

The top 50 hedge funds bought $4.2 billion worth of stock in the Consumer Discretionary group during Q2, which represented the largest aggregate purchase of all 10 sectors. Within the sector, the Consumer Services industry group saw $3.3 billion of inflows during the quarter. This was primarily driven by Starwood Hotels & Resorts. Starwood was the largest purchase by the top 50 hedge funds in Q2, with $2.7 billion flowing into the stock. Omni Partners LLP, a macro strategy-focused hedge fund and new addition to the top 50 list, bought $2.6 billion worth of shares in Starwood during Q2. Keep in mind that Marriott’s $13.5 billion acquisition of Starwood is currently pending and could close within the next two months. Omni Partners also took a new stake in Diamond Resorts International worth over $500 million. In the Consumer Services industry group, funds also added to Yum! Brands, Marriott, and Hilton.

Consumer Discretionary, Hedge Fund Inflows, Hedge Funds

The Media industry group was a surprising favorite among hedge funds in Q2. After being one of the largest aggregate sales for two consecutive quarters (Q4 2015 and Q1 2016), the Media group experienced purchases amounting to $1.8 billion in Q2. Firms that hedge funds piled into included Liberty Broadband, Comcast, Charter Communications, Twenty-First Century Fox, and Walt Disney.

The Consumer Staples group was the second largest aggregate purchase by the top 50 hedge funds (+$1.8 billion). Within the sector, the Food & Staples Retailing industry group saw $2.8 billion worth of purchases in Q2 (Industry group value exceeds sector value because the other industry groups faced net sales). Hedge funds bought over $1 billion worth of stock in CVS Health (ninth largest aggregate purchase), and also jumped into Kroger, Wal-Mart, and Ingles Markets.

Hedge Funds Sell Financials and Health Care

The Health Care sector was the second largest aggregate sale by the top 50 hedge funds in Q2 (-$2.1 billion). Two of the major sales in this group were Allergan and Pfizer. Keep in mind that Pfizer walked away from its massive planned acquisition of Allergan in April after the Obama administration threatened its tax inversion deal.

Consumer Discretionary, Hedge Fund Inflows, Hedge Funds

Hedge funds removed $1.4 billion worth of stock in Allergan, which represented the third largest sale during the quarter. The stock of the pharma company was down nearly 14% in the second quarter. D.E. Shaw & Co. reduced its position in Allergan by over 80%, Viking Global Investors cut its stake by 60%, and Paulson shed 27% of its position. Contrary to these funds, Carl Icahn’s Icahn Associates Holding took a new 1% stake in Allergan in Q2, which amounted to $786 million. Unlike the stock of Allergan, Pfizer’s stock soared in Q2, increasing in value by 19%. With that said, the top 50 hedge funds still sold $892 million worth of stock in Pfizer making it the sixth largest sale in Q2. Funds also removed nearly $1 billion from animal health firm Zoetis, which was driven by Pershing Square’s 50% reduction of its stake in the company.

Related: Hedge Funds Shuffle IT Holdings in Q1

One of the positives in the Health Care sector during Q2 was St. Jude Medical. The cardiovascular medical device company was the second largest purchase by the top 50 hedge funds. Funds bought $2.3 billion worth of stock in St. Jude Medical, led by a new 11% stake taken by Omni Partners. Carlson Capital and Adage Capital also contributed to the aggregate purchase. Keep in mind that Abbott Laboratories entered into an agreement to acquire St. Jude Medical for $24 billion back in late April. The stock was up 42% in the second quarter.

Netflix and Apple Top Sales in Q2

Netflix and Apple were the two largest sales during the quarter. The top 50 hedge funds removed $2 billion worth of Netflix stock, more than any other company in Q2. The selloff was led by Viking Global Investors, which reduced its stake by 22%, and Tiger Global, which exited its 4.2% ownership stake worth $1.6 billion. Netflix’s stock declined 10.5% during Q2 and is currently down 17% year-to-date.

Apple was the second largest sale during the quarter, after being the top sale in Q1. The top 50 hedge funds reduced their position in the iPhone maker by 40%, which equated to $1.8 billion being removed from the stock. Tiger Global, Greenlight Capital, and Adage Capital each cut their stake in Apple during Q2. Apple’s stock declined 12.3% during the second quarter, but is still up 3.9% for the year.

Microsoft and Facebook are Most Widely Held Stocks

At the end of Q2, 25 hedge funds had a position in Microsoft, making it the most widely held stock by the top 50 hedge funds for the second consecutive quarter. This was the same number of funds that owned the stock in Q1. Facebook was also held by 25 hedge funds at the end of the second quarter (increase from 23 funds in Q1). In addition, the social networking company was the seventh largest purchase by hedge funds in Q2, with $1.1 billion flowing into the stock.

Read more in Hedge Fund Ownership Quarterly

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  • Sector-Level and Company-Level Weighting Relative to S&P 500
  • Top 50 Holdings: Top 50 Hedge Funds
  • Three-Month Largest Holding Value Changes
  • Country Breakdown: Top 50 Hedge Funds
  • Sector Breakdown: Top 50 Hedge Funds versus S&P 500
  • Sector Movement: Top 50 Hedge Funds versus S&P 500
  • Industry Group Movement: Top 50 Hedge Funds
  • Cap Group Breakdown: Top 50 Hedge Funds

Read more about the ownership trends of hedge funds in this quarter’s edition of FactSet Hedge Fund Ownership Quarterly. Visit www.factset.com/hedgefund_ownership to launch the latest report.

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