Most funds struggle despite flat market and low position turnover
Hedge funds continue to face challenges in 2016. The 6% YTD decline of the most popular long positions has contributed to the -4% average return of equity long/short funds. Our hedge fund VIP list (ticker: GSTHHVIP) has lagged S&P 500 by 13 pp since August 2015, matching its 2008 record underperformance. However, the most concentrated stocks (GSTHHFHI) are on pace to outperform by more than 400 bp for the fifth year in a row (5% vs. 1%). We analyze holdings of 841 funds with $1.9 trillion of gross equity positions ($1.2 trillion long and $664 billion short) at the start of 2Q.
New VIPs hold promise for lagging hedge funds
The 14 new constituents of our Hedge Fund VIP list of most popular long positions have posted an average YTD return of 2% compared with 1% for the S&P 500 and -9% for the average stock leaving the basket. Historically, new first-time VIPs have outperformed the S&P 500 by 2 pp and 3 pp on average in the 3-month and 12-month periods following inclusion. Five of the 14 new constituents are first-time VIPs: HOT, BXLT, NWL, TAP, NXST.
Funds focus on fewer investment ideas and longer horizons
The trends of low position turnover and high portfolio density continued this quarter, with the average fund’s top 10 positions accounting for 68% of its portfolio, the highest on record. Largest position turnover was just 15%.
Funds shift away from Health Care toward commodity sectors
Hedge funds raised allocations to the Energy and Materials sectors while lowering allocations to Health Care, Industrials, and defensive, high yield sectors. Funds have the largest net sector exposure to Info Tech, at 21%.