Hedge funds have reached an all-time high level of crowding, marked by a significant increase in bets on the “Magnificent 7” tech stocks, reports Goldman Sachs. These stocks, including giants like Microsoft and Amazon, have contributed substantially to portfolio returns this year, accounting for 13% of the aggregate hedge fund long portfolio—twice their weight at the beginning of 2023.
Robust Returns but Growing Risks:
The emphasis on megacap growth and technology stocks has propelled returns for the identified popular hedge fund long positions, witnessing a remarkable 31% increase compared to the S&P 500’s 19% rise. However, this surge in popularity brings about an escalating risk of market crowding, reaching its highest level in the 22 years since Goldman began monitoring hedge funds.
Analysis of Hedge Fund Holdings:
Goldman Sachs analyzed the holdings of 735 hedge funds with a combined $2.4 trillion in gross equity positions. The report revealed that, on average, hedge funds allocated 70% of their long portfolio to their top 10 positions.
Changing Dynamics in Stock Markets:
In the broader stock market landscape, Goldman Sachs observed a diminishing ability to find contrarian stock trades throughout the year. The “stock-picking” environment has weakened, with many companies moving in tandem, reducing opportunities for differentiation.
Tech-Driven Shifts and Q3 Rotations:
The surge in hedge fund interest in tech stocks was propelled by the AI frenzy. However, the volatility introduced by GLP-1 drugs, such as Ozempic, triggered rotations in hedge fund portfolios in the third quarter, particularly towards the healthcare sector.
Short Interest Trends:
The report highlighted that short interest in stocks remains low, as hedge funds increasingly deploy tools like exchange-traded funds (ETFs) and futures for hedging, rather than relying on individual stock shorts. ETF shorts accounted for 80% of gross hedge fund ETF exposure, while single-stock shorts constituted only 30% of gross single-stock positions.