In an effort to stop the virtual bleeding and cauterize the wound, so to speak, hedge funds are repositioning their portfolios to dump the poorly performing Health Care stocks they had previously been favoring and grabbing up stocks in the Information Technology sector.
Analysts at Goldman Sachs released the latest edition of their “Hedge Fund Trend Monitor” on Friday and discovered that funds lagged the S&P 500 Index by 720 basis points over the three months ending in October. Many of their past favorite positions reversed course, becoming some of the worst-performing stocks after soaring sky-high for most of the year.
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Hedge funds shift to IT stocks
Analyst Ben Snider and his team found that during the third quarter, hedge funds started to shift their focus from the Health Care sector over to the Information Technology sector. It’s pretty clear why they started to vacate their Health Care positions as stocks like Valeant Pharmaceuticals, which previously was a high flier, plunged during the quarter, taking the performance of the hedge funds with sizeable positions in the stocks down with them.
According to the Goldman Sachs team, the typical hedge fund upped its net exposure to the Information Technology sector by more than 100 basis points while slashing their Health Care long exposure by 70 basis points.
Underweight sectors remain underweight
The Goldman team also discovered that hedge funds added to three the four sectors they were the most underweight in during the third quarter, including the Information Technology sector, although they still remain underweight on those sectors. They report that funds upped their positions in Financials and Consumer Staples by about 30 basis points.
The only sector in which hedge funds were underweight and moved further underweight in was Telecom Services. Here’s a quick look at hedge fund positioning by sector:
Health Care remains popular despite the plunge
Snider and team found that although the average fund cut its long position in Health Care weighting by 66 basis points during the third quarter, it remained “relatively overweight” on the sector even though Health Care stocks have plunged. The analysts add that all five of the sectors in which the average fund was overweight relative to the Russell 3000 saw their positions fall.
The decline in Health Care holdings was the biggest decline. Hedge funds also trimmed their positions in Consumer Discretionary, Industrials, Materials and Energy, although they remain overweight on all four of the sectors. The Goldman team also reports that the Consumer Discretionary and Consumer Staples sectors have been the biggest overweight and underweight long positions the most consistently, and both of these trends continued during the third quarter.
Hedge funds’ moves mirror those of mutual funds
Interestingly, they said hedge funds’ position changes during the third quarter were very similar to the changes made by mutual funds. Mutual funds also upped their allocations in the IT and Financials sector, raising the former’s exposure by 60 basis points and the latter’s exposure by 40 basis points. They also cut their exposure to Energy, Health Care and Materials.
The sector in which hedge funds and mutual funds didn’t agree on was Consumer Discretionary, as mutual funds upped their weighting during the quarter.
Images in this article are courtesy Goldman Sachs.