Goldman Says Hedge Funds Kept Long Bets Despite Rally Doubts

(Bloomberg) -- The fast money’s lack of conviction in the 2019 stock rally has become notorious, but managers retained faith in their most-loved names.

Even as hedge funds kept equity exposures light in this year’s advance, the relative size of their biggest long positions remained “extremely elevated,” according to the latest research from Goldman Sachs Group Inc.

That faith was rewarded. A basket of the long positions most favored by hedge funds -- which includes shares of Amazon.com Inc, Microsoft Corp. and Alibaba Group Holding Ltd. -- outperformed the S&P 500 through the start of the second quarter, the bank said in a note.

The research tempers the narrative that funds lacked conviction amid this year’s remarkable stock market recovery -- in fact they did, it just seems to have been concentrated in a group of proven winners. It’s also a sign that fears about the risk of fast-money crowding may be wide of the mark. Hedge fund ownership has proven a good signal for equity returns over two decades, regardless of high valuations, according to the U.S. bank.

“Rather than signaling ‘over ownership,’ stocks with a large number of hedge fund owners have consistently outperformed peers,” wrote strategists led by Ben Snider and David Kostin. “Surprisingly, this pattern has held even for stocks with elevated multiples relative to their histories.”

Short on Shorts

In 2019, the most popular bets rewarded investors with an 18% return into the start of the second quarter, according to Goldman, versus about 15% for the S&P 500 in the same period.

The list of investments included in the so-called Very Important Positions basket includes tech giants like Alphabet Inc. and Facebook Inc. That will chime with many investors; the latest Bank of America Merrill Lynch fund manager survey showed that being long U.S. tech was the most crowded trade globally.

The winning performance of these popular trades wasn’t enough to banish all the hedge fund blues, however.

They have endured a rough period during this year’s stock market recovery, with the HFRX Equity Hedge Index gaining just 5%. That’s in part because of what hedge funds are most famous for: Short positions, or bets that a share will fall.

On that score, the doubts were palpable. The fast money cut its leverage in the first quarter, and short interest on single stocks fell to the lowest since 2006, according to Goldman. While the most popular short bets did make money, performance lagged the benchmark index.

Still, the fact that both their top long and short positions brought decent returns will likely be welcome news for many funds. The fortunes of active managers as a group appear to be on the up in 2019; Bank of America Corp. says they are so far delivering their second-best performance since the financial crisis. Stock-pickers are benefiting as single-share correlations are weaker than sector correlations, meaning selecting individual companies matters more than picking segments, according to BofA.

Stocks most beloved by hedge funds outperformed the S&P 500 in 61% of quarters since 2001, posting an average quarterly excess return of 55 basis points, according to Goldman.

--With assistance from Justina Lee and Dani Burger.

To contact the reporter on this story: Ksenia Galouchko in London at kgalouchko1@bloomberg.net

To contact the editors responsible for this story: Blaise Robinson at brobinson58@bloomberg.net, Samuel Potter, Sid Verma

©2019 Bloomberg L.P.