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Hedge Funds Most Concentrated Stocks Have Been Outperforming

Maybe there really is some truth to the notion that there is wisdom in a crowd. Because it turns out that a portfolio of stocks that have the highest percentage of their market cap owned by hedge funds, i.e, the “most concentrated” stocks, has solidly outperformed the S&P 500 index for the last 3.5 years.

Hedge Funds Concentration

According to the Goldman Sachs May 20th Hedge Fund Trend Monitor, investing in a basket of the 20 “most concentrated” stocks “has a strong track record over more than 10 years. Since 2001, the strategy has outperformed the market 70% of the time by an average of 255 bp per quarter.”

More on high hedge funds’ concentration strategy

Hedge Funds Concentration

Ben Snider and the GS team note that the high hedge fund concentration strategy has historically worked best in markets that have been trending up, but performed poorly during periods of choppy or flat markets. Of note, so far in 2015 the “most concentrated” basket has outperformed the S&P 500 by 316 basis points (+7.1% compared to +3.9%). Also of interest, the stocks in the concentrated portfolio are most often mid-caps (ie, toward the bottom of the S&P 500 market cap distribution), which outperformed large-caps from 2004 through 2007. Keep in mind that the portfolio is not sector neutral versus the S&P 500.

Hedge Funds Concentration

The analysts also report that six new stocks have been added to the Goldman Sachs High Concentration basket this year: DIRECTV, Expedia, Micron Technology, Netflix, Autodesk and Time Warner Cable.

Strong performance from “most concentrated” stocks since 2011

The Goldman Sachs report also highlighted that the most concentrated stocks continue to do well in 2015 even after posting very strong returns for three years in a row. The GS “most concentrated” portfolio underperformed the S&P 500 by 400 basis points in 2011 (-2% compared to +2%), but it beat the S&P index by 800 basis points in 2012 (+24% compared to +16%), a whopping 1700 basis points in 2013 (+51% compared to +34%) and a solid 722 basis points in 2014.

In terms of recent results for the Goldman Sachs “most concentrated” portfolio, the 20 most concentrated stocks have have beaten the S&P 500 index by 316 basis points year to date in 2015.