Hedge Fund Beta Declines Amid Market Instability

Hedge Fund Beta Declines Amid Market Instability

Citigroup’s latest on hedge fund and mutual fund holdings also includes a survey of institutional investors about the sectors expected to outperform/underperform this year. The sectors that investors are most bullish about are financials, industrials and information technology. Telecom services, materials and utilities are expected to underperform by most of the respondents in the survey.

SP500 VS HFRI Equity Hedge

Beta of top hedge fund holdings

The research also found that beta of top hedge fund holdings has been pulled down to 1.0, below the historical average of 1.07 and lowest since second quarter of 2012. This alludes to the reduced exposure for hedge funds, similar conclusion was also reached in Goldman Sachs’ Hedge Fund Trend Monitor. The analysts at Citi admit that there could be other reasons for this defensive positioning, but the low beta ties into the recent market instability and hedge funds’ inability to generate alpha.

Hedge Fund beta

Apple came up  most frequently among top positions of hedge funds

While Citi’s analysis found that Apple Inc. (NASDAQ:AAPL) still came up most frequently among top positions of hedge funds, they also found that Twenty-First Century Fox Inc (NASDAQ:FOX) was the most over-owned hedge fund stock compared to the value of its market cap. In mutual funds, the most over-owned relative to market cap were Gilead Sciences, Inc. (NASDAQ:GILD) and The Home Depot, Inc. (NYSE:HD).

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The report also includes a brief comparison of top holdings of growth and value funds, but there are a very limited number of funds in the value category to make a real comparison. However Apple Inc. (NASDAQ:AAPL) remains the favorite holding of value hedge funds as well, followed by Priceline.com Inc (NASDAQ:PCLN), Google Inc (NASDAQ:GOOG) and QUALCOMM, Inc. (NASDAQ:QCOM).

Citi also points out that long/short equity hedge funds have significantly lagged the S&P 500, mostly because of underwhelming performance in the short portfolio. For the year S&P 500 is up 16.3% whereas HFRI Equity Hedge Index has taken in a +6.1% gain only.

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