Hedge funds are keeping their portfolios static compared to their historic practices. The average turnover is at 29 percent for Q3 2012, which marks the lowest point in a 10-year period, during which the turnover averaged around 35 percent. The top holdings saw a change of only 17 percent. This has made the hedge funds highly dependent on a few key stocks for performance. Goldman Sachs Group, Inc. (NYSE:GS) research notes that any average hedge fund has 64 percent of its long portfolio concentrated in the top ten holdings, which is higher than the average of typical large and small mutual funds, S&P 500 (S&P Indices:.INX), and Russell 2000 index.
The looming fiscal cliff is going to affect the entire economy of the United States and the trillion dollar industry of hedge funds won’t be any different. The exposure of hedge funds to the consumer discretionary sector has been at its maximum and the upcoming tax increases will take the toll on the returns from this sector. The research notes that the average exposure of the 696 hedge funds followed by the trend monitor is 22 percent. Every one in four stocks in the VIP stock pick list of Goldman Sachs Group, Inc.(NYSE:GS) is a consumer discretionary pick. The sector was up 16 percent YTD and has outperformed the S&P 500 (S&P Indices:.INX) (up 10 percent), but presents a major risk in the face of the expected budgetary changes. Goldman Sachs Group, Inc. (NYSE:GS) estimates a $233 billion headwind coming from the expiration of payroll tax cuts, while consumer spending will be impacted by $110 billion.
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Most notably, the fiscal cliff is especially going to effect categories like autos, consumer electronics, home furnishings, home improvement, lodging and gaming, specialty apparel, and sporting goods. The hedge funds have a significant tilt in this sector, as shown in the below chart. 650 bp of the total 768 bp preference lies in high risk sub sectors.
Sub sectors that could be the least hurt by implementation of the fiscal cliff are drug stores, food, and tobacco.
In other sectors, hedge funds have the lowest overall exposure in Consumer Staples, and the long portfolio exposure in Information technology underwent the highest decrease of 66 bps in Q3.