The Most Popular Hedge Fund Stocks Are Getting Hit the Hardest

(Bloomberg) -- The smart money has been one of the biggest victims in the declines sweeping through equity markets.

While the S&P 500 Index fell 1 percent last week, stocks with the highest hedge fund or exchanged-traded fund ownership posted losses that were four times larger, a study from UBS Group AG showed. Broadly, equity returns have been inversely tied to their popularity with funds. That is, the more loved by hedge funds or ETFs, the bigger the drop.

Shares remained under pressure Monday, with the S&P 500 down 0.6 percent for its biggest three-day drop since June. The Nasdaq 100 fell 1.5 percent, pushing its loss since Thursday past 5 percent.

Following the speculative money or riding the passive flows isn’t working -- for now. To Keith Parker, the firm’s head of equity strategy, the data highlight a bigger risk: concerted selling. The tendency to unload is particularly dangerous from hedge funds, whose equity exposure has risen to extreme highs relative to the past decade.

“There has been a notable unwind of hedge fund positioning,” Parker wrote in a note to clients. “Long short hedge fund positioning is more than 3 standard deviation above average, which presents the risk of unwinding further.”

U.S. stocks last week suffered one of this year’s biggest declines as yields on 10-year Treasuries spiked to a seven-year high, spurring concern that the low-rate era is over and threatening one of the key pillars for the equity bull market.

As hedge funds and ETF investors stepped up selling, corporate buying dwindled due to a blackout on discretionary buybacks before the start of earnings season. Demand for companies fell to $14 billion last week, down from this year’s peak of about $40 billion, data compiled by UBS showed. The liquidity backdrop may not improve until later this month, Parker said.

--With assistance from Felice Maranz.

To contact the reporter on this story: Lu Wang in New York at lwang8@bloomberg.net

To contact the editors responsible for this story: Courtney Dentch at cdentch1@bloomberg.net, Chris Nagi, Richard Richtmyer

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