During the last six weeks our Hedge Fund VIP basket of popular long positions has led the S&P 500 by 470 bp, ending the basket’s record 1500 bp stretch of underperformance since August 2015.
VIPs benefited from a surge in net leverage as well as a market rotation toward cyclical sectors and factors that hedge funds have continued to prefer despite the early 2016 outperformance of bond-like equities such as Utilities and low volatility stocks. We analyze 826 funds with $1.8 trillion of gross equity positions ($1.1 trillion long and $652 billion short) at start of 3Q.
High hedge fund concentration stocks continue to shine
Although the average equity long/short fund and our VIP basket have eachreturned just 2% YTD, lagging the S&P 500 (+9%), our High Concentrationbasket (ticker: GSTHHFHI) has returned 20% YTD. The basket is on pace topost its fifth straight year of leading the S&P 500 by more than 400 bp.
Funds increase cyclical sector tilt toward Information Technology
Hedge funds continue to hold large overweight positions in cyclical sectorssuch as Information Technology and Consumer Discretionary. Funds cutexposure to the “bond proxy” Utilities and Consumer Staples sectors andshorted Treasury ETFs but maintained a large underweight in Financials.
Hedge fund crowding declines but position turnover remains low
While portfolio position turnover remained low in 2Q, funds shifted assetsaway from the most crowded positions during the quarter. Turnover in ourVIP basket registered its highest level since 2012 and our measure of hedgefund crowding declined sharply in 2Q from a record high in 1Q.