Goldman Sachs recently issued their hedge fund monitor for the fourth quarter of 2012. One of the most interesting facts in the 40 page report: American International Group, Inc. (NYSE:AIG) has replaced Apple Inc. (NASDAQ:AAPL) as the most popular hedge fund stock. Although we have noted that American International Group, Inc. (NYSE:AIG) has become a popular position among hedge funds while Apple Inc. (NASDAQ:AAPL)’s popularity has decreased, American International Group, Inc. (NYSE:AIG) replacing Apple Inc. (NASDAQ:AAPL) as the top position is a bit of a surprise. We will have more coverage on Goldman’s conclusions, but below we provide the summary from Goldman.
Hedge fund net long exposure rose to 52%, matching the 1Q 2007 high. Turnover remained at decade lows. American International Group, Inc. (NYSE:AIG) has supplanted Apple Inc. (NASDAQ:AAPL) as the top hedge fund position. While Very Important Positions that “mattered most” surged 23% last year, the typical fund returned just 8%, lagging the S&P 500 (INDEXSP:.INX) by over 800 bp. In 2013 our VIP basket is lagging S&P 500 by 36 bp. This report analyzes the positions of 725 hedge funds with $1.3 tn of gross assets at the start of 2013 ($883 billion of long stock and ETF holdings and an estimated $422 billion of shorts.)
Hedge fund net long exposure rose to 10-year high in 4Q
Net long exposure rose to 52% in 4Q, mirroring broad market performance and tying 1Q 2007 as the highest level in a decade. However, turnover of all positions remained at the record low of 29% established in 3Q 2012.
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Increased exposure and low turnover boosted popular stocks
Our VIP and High Concentration baskets of popular hedge fund holdings each outperformed the S&P 500 (INDEXSP:.INX) by over 700 bp in 2012, benefiting from the combination of increased leverage and low turnover. However, funds reduced positions in underperforming long-time favorites American International Group, Inc. (NYSE:AIG) and GLD.
Most hedge funds continue to underperform in 2013
In 2013 YTD the average hedge fund has returned 3% and lags the broad market by 400 bp. In 2012 the typical fund returned 8% vs. 16% for the S&P 500 (INDEXSP:.INX) and 14% for the average large-cap core mutual fund.
This Hedge Fund Trend Monitor analyzes 725 hedge funds with $1.3 trillion of gross equity positions ($883 billion long and $422 billion short). This report focuses on hedge fund positions at the start of 2013 and is based on 13-F filings as of February 15, 2013. We list eight conclusions below:
1. LEVERAGE: We estimate hedge funds in aggregate operate 52% net long ($462 billion net/$883 billion long), rivaling the all-time high of 52% in 1Q 2007. Risk appetite by this metric increased during the quarter from 48% in 3Q 2012. We estimate 15% of short positioning is conducted via ETFs with 10% at the broad index level.
2. TURNOVER: Turnover of all hedge fund positions remained at a record low of 29% during 4Q 2012, well below the 10-year average of 35%. The top quartile of positions (largest holdings) turned over just 17% while the bottom-quartile of positions (smallest holdings) turned over 40%. These metrics remain at 10-year lows since 3Q.
3. VERY IMPORTANT POSITIONS: Our Hedge Fund VIP list contains the 50 stocks that appear most frequently among the top 10 holdings of fundamentally-driven hedge fund portfolios. The basket returned 23% in 2012, outperforming S&P 500 (INDEXSP:.INX) by 720 bp, but has lagged by 36 bp YTD in 2013.
This is the first time in three years that AAPL is not the top stock, although it remains in the list as the third most popular. Top 10 VIP stocks: American International Group, Inc. (NYSE:AIG), Google Inc (NASDAQ:GOOG), Apple Inc. (NASDAQ:AAPL), C, NX Y, JPM, PCLN, MSFT, GM, and QCOM.
4. VERY IMPORTANT SHORT POSITIONS (check out ValueWalk’s full list of European short positions): Our Hedge Fund Very Important Short Position basket contains the 50 S&P 500 stocks with the highest total dollar value of short interest outstanding that are not in our VIP long basket. The VISP basket returned 13% in 2012 and 7% YTD in 2013. Our VIP pair trade has mirrored the HFR Equity Hedge Index with an average quarterly return of 141 bp vs. 132 bp since 2001 but the Sharpe Ratio has been higher (0.44 vs. 0.25). New top shorts include XOM, IBM, and GE.
5. SECTOR POSITIONING: Hedge funds have the greatest net portfolio exposure to Consumer Discretionary (21%), Financials (16%) and Information Technology (14%), combining long and short position data. Consumer Discretionary consistently ranks as the sector with the largest hedge fund allocation. Hedge funds are not benchmarked but relative to the Russell 3000 universe, they are 786 bp overweight Consumer Discretionary
(21% vs. 13%), and 579 bp underweight Consumer Staples (4% vs. 10%).
6. CONCENTRATION: Our basket of the 20 “Most Concentrated” hedge fund stocks has outperformed S&P 500 by 396 bp YTD in 2013 (10.8% vs. 6.9%). We define “concentration” as the share of equity capitalization owned in total by hedge funds. Since 2001, the strategy has outperformed S&P 500 68% of the time by an average of 260 bp per quarter (not annualized). Recent outperformance is consistent with the increase in M&A activity.
7. SIZE: Large-cap stocks account for 63% of aggregate hedge fund equity holdings while small-cap stocks comprise just 16%. The typical hedge fund allocates 48% of long equity assets to the 500 largest stocks and 32% to small-caps (Russell 2000). The difference between aggregate and average suggests that the largest hedge funds target large-cap stocks while smaller funds emphasize smaller stocks.
8. PERFORMANCE: Hedge funds saw modest gains in 2012 as longs outperformed but shorts hampered returns. The average hedge fund returned 8% in 2012 compared with 16% for the S&P 500 and 14% for the average large-cap core mutual fund. The distribution of performance shows roughly 16% of funds posted negative returns, while another 16% of funds outperformed the S&P 500. Funds continue to lag YTD in 2013.