A Look At Hedge Fund Internet Software Crowding

Hedge Fund Internet Software Crowding by AlphaBetaWorks Charts

Hedge funds tend to pile into the same few stocks. In most sectors these crowded bets underperform. In previous articles we discussed the crowding of hedge fund energy as well as exploration and production bets. Internet software stocks show similar underperformance.

Hedge Fund Internet Software Aggregate

If markets were flat since 2004, the aggregate position-weighted hedge fund internet software portfolio (HF Aggregate) would have lost 25%. This is HF Aggregate’s risk adjust return from security selection (?Return):

Hedge Fund Internet Software Crowding
Hedge Fund Internet Software Aggregate’s Residual Returns (?Returns)

Given the compounding of ?Returns and internet software sector returns, the cumulative underperformance is even larger: Since 2004 HF Aggregate returned 200%. A portfolio with the same systematic risk as HF Aggregate (Factor Portfolio) returned 300%. Investors in crowded bets missed out on 100% in gains:

Hedge Fund Internet Software Crowding
Hedge Fund Internet Software Aggregate’s Total and Factor Returns

Hedge Fund Internet Software Crowding History

The following video shows the history of crowded hedge fund internet software bets. These are the stocks behind the record:

Current Hedge Fund Internet Software Crowding

The following are the currently crowded hedge fund internet software bets. Just two (long EQIX, short/underweight GOOGL) are responsible for over three quarters of the risk of HF Internet Software Aggregate:

Position (%)
SymbolNameHF AggregateMarket AggregateRelativeShare of Risk (%)
EQIXEquinix, Inc.23.771.6322.1453.73
GOOGLGoogle Inc. Class A10.5144.39-33.8825.65
TWTRTwitter, Inc.0.493.46-2.974.65
ZNGAZynga Inc. Class A2.890.262.633.52, Inc.0.000.17-0.172.07
PPandora Media, Inc.2.410.531.881.87
RAXRackspace Hosting, Inc.3.130.862.271.76
SFLYShutterfly, Inc.2.320.222.101.38
WBMDWebMD Health Corp.1.840.181.660.93
NERONeuroMama Ltd.0.000.74-0.740.75
AKAMAkamai Technologies, Inc.3.041.501.540.61
TRLATrulia, Inc.
YNDXYandex NV Class A2.320.811.510.33
MSTRMicroStrategy Incorporated Class A1.540.201.340.31
LNKDLinkedIn Corporation Class A2.203.20-1.000.27
FBFacebook, Inc. Class A21.7622.54-0.780.21
MELIMercadoLibre SA0.000.81-0.810.15
KINGKing Digital Entertainment Plc1.050.630.420.13
ECOMChanneladvisor Corporation0.420.060.370.11
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