Hedge-Fund Wolfpack Stalks Financials as Alpha Pangs Grow

Once a quarter, Citigroup Inc. strategist Tobias Levkovich pulls a David Letterman and creates a Top 10 list of equity holdings at the biggest hedge funds and mutual funds.

The latest study could arguably be titled “Top 10 Reasons Your Alpha Has Disappeared” since it illuminates a shift in holdings that may lead to sixth straight quarter of equity hedge-fund returns that trail the Standard & Poor’s 500 Index.

The 50 biggest hedge funds loaded up on financial and energy stocks last quarter, according to the report, with both groups gaining 7 percentage points to represent 17 percent of the top holdings. Technology shares remained the biggest share, at 23 percent, while funds fled from the consumer shares that led the bull market by cutting holdings in half to 13 percent.

By comparison, if you own an index fund tracking the S&P 500, your weightings look like this: Financials at 16 percent, energy at 10 percent, technology at 19 percent and consumer-discretionary at 12 percent.

Technology also represented the biggest slice of the pie at the 50 biggest actively managed mutual funds, representing 23 percent of holdings. Health-care stocks, which have a 13 percent weighting in the S&P 500, were next with 20 percent followed by financials at 17 percent. The mutual funds backed away from industrial shares in the quarter, sending their weighting down 7 percent to 10 percent, according to the report.

Leaders Missing

Utilities were conspicuously lacking from the top holdings of both hedge funds and mutual funds in the quarter, when the group led the market higher with a 9 percent surge as a surprise drop in Treasury yields made their dividends more attractive.

Alpha may be elusive for another quarter at many funds. The HFRX Equity Hedge Index has trailed the S&P 500 for five straight quarters, rising 11 percent since the end of 2012 compared with a 35 percent gain in the S&P 500. The streak is poised to continue with the hedge-fund index down 1.4 percent since the end of March and the S&P 500 up 2.8 percent.

Among individual stocks, Apple Inc. remained the most-popular among hedge funds as 11 portfolios listed the iPhone maker as a top holding compared with 14 in the fourth quarter. Microsoft Corp. showed up in eight funds, followed by American International Group Inc., Citigroup Inc., Actavis Plc and Berkshire Hathaway Inc. in seven funds each.

Google Inc. was the favorite pick of active mutual fund managers, appearing in half of the largest 50 funds, followed by Microsoft Corp., Wells Fargo & Co., Merck & Co., Apple and JPMorgan Chase & Co.

If only for the sake of gossip, it’s also fun to look at the handful of the 50 biggest S&P 500 stocks that don’t show up as top holdings in any of the biggest funds. For example, Goldman Sachs Group Inc. isn’t a top holding in any of the largest actively managed mutual funds. Someone could probably write a pretty funny Top 10 list of the reasons why.

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