Monday, February 22, 2010

Hedge Fund Holdings Update from Goldman

First, Goldman's summary of the the results:

Hedge Fund re-risking slowed following large increases over 2009

Hedge fund long equity assets appreciated by 3% in 4Q compared with a 6% return for the market suggesting levered funds were net sellers. Funds now own 3.8% of the Russell 3000 index compared with 2.9% in 4Q 2008.

Little change in net long exposure and net weighting in cyclicals

Hedge fund net long exposure increased only modestly to 42% in 4Q from 40% in 3Q. Net weighting in cyclical sectors rose to 73% from 72% last quarter. Funds rotated within the cyclicals, moving out of Information Technology and into Industrials and Consumer Discretionary.

Hedge funds rotate into Industrials and out of Info Tech

Hedge funds are underweight Information Technology for the first time since 2005 when comparing their net weighting with the Russell 3000. Hedge funds lifted their net weighting in Industrials to 9% from 6% during 4Q, the largest increase of any sector, but they remain net underweight.

And with that preamble out of the way, here are the relevant charts.

In Q4, hedge funds started to rotate out of IT and defensive sectors, and rotate into cyclicals, mostly industrials. Additionally, after surging from Q2 to Q3, net long exposure, at 42%, has commenced to plateau. Most notable, HF ownership of US equities has hit an inflection point and is now declining.

A more detailed look into IT and industrial exposure, as well as specific stocks in these industries. IT stocks getting thrown out with the bathwater include NSM, FIS, EBAY, FFIV, and ONNN. On the other end, Industrials which have gotten the valueinvestorclub stamp of approval are SWK, AONE, FDX, ITT and BUCY.

Next up, is the Goldman Sachs VIP list, or the names that "most frequently appear among the largest 10 holdings of hedge funds." No surprises here: this is groupthink central. The contrarians among you will be shorting the following names with reckless abandon: AAPL, PFE, BAC, GOOG, JPM, MSFT, MA, DTV, WFC, CVS (after all, the pre-marginal buyers are in. At this point it is just the retail investors left to provide marginal buying).

Next, Goldman looks at the most concentrated Hedge Fund holdings: i.e., the stocks whose holders are primarily represented by hedge funds.

And, inversely, here are the stocks most hated the most by hedge funds:

Next up, let's not forget the short side. Here is how Goldman estimates hedge fund short exposure:

Short positions shed light on the “other side” of fund portfolios

We combined $621 billion of single-stock and ETF long holdingin 13-F filings of 627 hedge funds with our estimate of hedge fund short positions (based on $425 billion in single-stock, ETF and market index short interest positions filed with exchanges). We estimate hedge funds accounted for 85% of total short interest positions, or $361 billion as of December 31, 2009. Our analysis suggests the typical hedge fund operates 42% net long, up from 40% in 3Q 2009 and up from 21% at year-end 2008. Part of the short positioning is conducted at the market level via ETFs.

Short positions offer more comprehensive insight to hedge fund sector tilts. Our analysis of short interest data suggests that hedge fund sector net exposure may differ from what 13-F filings indicate. For example, Energy represents 9% of hedge fund long holdings, underweight relative to the Russell 3000. However, hedge funds hold a relatively small amount of shorts in the sector, suggesting that funds are actually neutral Energy on a net basis.

Hedge Funds appear net underweight Info Tech for the first time since 2005. Hedge funds appear to hold a 16% net weighting in Info Tech versus 20% weighting in the Russell 3000. Hedge funds reduced exposure to Info Tech on the long side (17% vs. 19% in 3Q) and increased allocation to the sector on the short side (18% vs. 17% in 3Q). Hedge funds were last underweight Info Tech in 2005 although funds were neutral in 2007.

Financials appears neutral on the long side of hedge fund portfolios (16% vs. 16% Russell 3000 weighting). However, short interest data indicates that Financials also accounts for 19% of all short positions, the highest weighting of any sector. This suggests that funds indeed “hedge” their Financials exposure. Combining long and short data, hedge funds appear to hold a 12% net weighting in Financials.

Industrials net long exposure rose to 37% from 26% last quarter. Although Materials and Telecom Services represent just 9% of gross assets, Hedge Fund have the highest net long exposure to these two sectors, consistent with the previous two quarters.

We believe hedge funds account for the vast majority of short positions. The steady growth of shorts in the US equity market during the past eight years has accompanied the rise in hedge fund assets (see Exhibits 15 & 16). We estimate that hedge funds account for 85% of all short positions. In the future, mutual funds may become a larger share of the short market, given initiatives such as 130/30 programs. Short interest for the S&P 500 declined over the second half of 2009. Currently, 2.1% of equity cap is held short while the short interest ratio remains at a 10-year low.

We construct a “typical” long/short hedge fund portfolio. Combining our hedge fund long and short data, we constructed two 50-stock equal-weighted portfolios (one long and one short) in an attempt to replicate a “typical” hedge fund (see Exhibits 17 and 18).

We acknowledge certain limitations to our hedge fund short position analysis. There is time delay, as short interest is filed bi-weekly with the exchanges and released with a 10-day delay. The short interest information we have represents positions reported by U.S. broker/dealers. Broker/dealers incorporated outside the US do not have to report their positions. Swaps and other derivatives are also not captured in this analysis.

For all you "alphaclone" fans, or whatever it's called, who think there is some incredible complexity to recreating a hedge fund portfolio, here is the typical hedge fund long portfolio.

And yes, there is short exposure too.

Some interesting observations from Goldman on ETFs. We will have substantially more to say on this topic tomorro, not so much for hedge funds, as for firms like Goldman itself.

Hedge funds appear to use ETFs more as a hedging tool than as a directional investment vehicle, based on our analysis of 13-F and short interest filings. We estimate that hedge funds hold $84 billion in gross exposure to ETFs, compared with $982 billion of gross exposure to single-stocks.

The $65 billion of short ETF positions accounts for 77% of the hedge fund gross ETF exposure. In contrast, single-stock short positions ($310 billion) represent 34% of hedge fund gross single-stock positions. The most shorted ETFs tend to be index hedges (representing $32 billion of the $65 short positions). Commodity-related ETFs appear to be the only ETFs that hedge funds utilize on the long side.

ETFs now represent 3% of long assets, down from 6% in 1Q 2009. This is consistent with a falling correlation environment, in which stock-picking comes into focus.

And here are some summary tables.

First - the 50 stocks with the largest number of hedge fund investors.

The stocks with the greatest hedge fund rotation in and out of their holdings.

Listing out the small cap (under $1 billion mkt cap) stocks with the largest hedge fund concentration.

And large cap...

The top 50 stock seeing the greatest hedge fund inflow:

And outflow:

This chart may be the most relevant to many of you, who are focused on capturing the short squeeze in the small caps, where violent moves to the upside on a concerted effort to trap shorts, have worked so well on so many occasions.

And here are the big cap stocks with the biggest short interest:

Lastly, here are the top 100 hedge funds listed by Equity assets (not AUM, and excluding credit and other holdings). Note that of the top 10 HFs, there are 4 quant names, 5 if in the top 11. Of the top 11 hedge funds, which control $160 billion in Equity assets, 5 of the names are quants and these have $102 billion in equity assets. Roughly 63% of equity assets in the top 10, well 11, are controlled by quants.

(from ZeroHedge, February 22, 2010)

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