Photographer: Michael Nagle/Bloomberg

Goldman: Hedge Funds' Most Loved Stocks Are Struggling

Investing in companies on the VIP list hasn't paid off in recent months.

While hedge funds have slightly outperformed the S&P 500 so far in the dire start to 2016, it turns out stocks with the lowest amount of ownership by the industry are performing better than the ones it loves. 

According to the most recent "Hedge Fund Monitor" from David Kostin, chief U.S. equity strategist for Goldman Sachs Group Inc., which analyzes 860 hedge funds with $1.6 trillion is gross equity positions, the most popular stocks have continued to lag the market. 

The stocks with the lowest concentration of hedge fund ownership beat the S&P 500 53 percent of the time, Kostin says. This year, the basket outperformed the broader index by 541 basis points. Kostin's team adds that part of the reason for this is that hedge funds have been selling a large portion of their holdings, dropping net long exposure to 45 percent, the lowest since 2012, as they look to shed risk. 

"Our analysis of 13-F positions and short interest data filed with exchanges suggest that funds operated with net long exposure of 45 percent at the start of 2016. This positioning represented a substantial decrease from the record high of 57 percent reached in 1Q 2015, although it still registered above the trough exposures reached during 2008 and 2011....As the market rotated away from momentum and popular positions, the stocks least owned by hedge funds soared."

Screen Shot 2016-02-23 at 9.12.47 AM
Goldman Sachs

Here's a broader look at how things stack up. As you can see, the hedge fund VIP list (most loved stocks) is one of the worst performers, while gold is finally regaining some of its luster and leading the pack. 

Screen Shot 2016-02-23 at 8.56.11 AM
Goldman Sachs

The note also dived into turnover in positions during the past quarter. Some of the stocks added to the VIP list include Broadcom Ltd., Pfizer Inc., Expedia Inc., and Valeant Pharmaceuticals International Inc. Some of the ones that dropped were AbbVie Inc., General Electric Co., Broadcom Corp., Cheniere Energy Inc., and Perrigo Co. Plc. Also of interest is that stocks that make up "FANG" - Facebook Inc., Inc., Netflix Inc., and Alphabet Inc. - accounted for four percent of total equity assets in hedge funds at the start of 2016. This certainly played a role in hurting performance, as all but Facebook are down more than the broader market this year. 

Screen Shot 2016-02-23 at 9.08.01 AM
Goldman Sachs


Before it's here, it's on the Bloomberg Terminal.