--> The return of return dispersion
Low return dispersion has limited alpha opportunity and has weighed on hedge fund performance in recent years but a recent rebound in dispersion bodes well for the stock-picking environment. Hedge fund favorite long positions tilt toward growth and momentum, the two best-performing factors in 2015. Sector and stock exposures show an uncommon appetite for defensives, which have outpaced cyclicals by nearly 10 pp YTD. This report analyzes 833 hedge funds with $2.1 trillion of gross equity positions at the start of 3Q 2015 ($1.5 trillion long and $684 billion short).
* Funds lag in 2015 but rising dispersion supports alpha generation
Return dispersion recently rebounded from historical lows, boosting prospects for stock-picking alpha. Hedge funds typically perform best when dispersion is high. Many funds have beaten the market YTD in sectors with the highest dispersion, led by Energy. Our Hedge Fund VIP list of most popular longs (Bloomberg: GSTHHVIP) has outpaced the S&P 500 by 44 bp YTD. 15 new constituents include DLTR, ENDP, HCA, KHC, STZ, and TDG.
* Funds adopt defensive posture with sector and stock allocations
With defensives beating cyclicals by 950 bp YTD, funds lowered weightings in most cyclical sectors, adding exposure to defensives such as Utilities, Staples, and Telecom. Similarly, during the last 6 months Hedge Fund VIPs
have been more correlated with defensives than at any time since 2011.
* Growth and momentum factor tilts benefit portfolios in 2015
Growth and momentum are two of the best-performing factors YTD and the largest factor exposures of our Hedge Fund VIP list. The global growth outlook, strong USD, and impending fed hike have caused funds to shift
exposures toward domestic-facing, defensive, and “high quality” stocks.