If You Can’t Join Hedge Funds, Beat Them

If You Can’t Join Hedge Funds, Beat Them
Carl Hazeley

about 3 years ago3 mins

Mentioned in story

What’s going on here?

Whether it’s thanks to the WallStreetBets saga or just frank admiration for last year’s best performers, there’s been a lot of interest recently in what hedge funds are buying and selling. And if you know that, you’ll know how you can beat them at their own game…

What does this mean?

Following on from our lnsight a few weeks ago focusing on stock-picking players, a recent report from investment bank Goldman Sachs has extracted three key trends from how hedge funds in general were invested at the start of the year.

1️⃣ Leverage is high

Goldman Sachs’ data shows both hedge funds’ net and gross exposures to stocks at record highs. Short interest, meanwhile – the proportion of shares being used to bet their value will fall – currently accounts for just 1.5% of the US S&P 500: the lowest it’s been in 25 years.

“Net long exposure” = investment buys - shorts, expressed in % (Source: Goldman Sachs, FactSet)
“Net long exposure” = investment buys - shorts, expressed in % (Source: Goldman Sachs, FactSet)

💡 The takeaway: Hedge funds overall are optimistic about stocks’ future performance – which is why they’re backing them at levels never seen before.

2️⃣ Growth over value

One of the most heated debates of 2021 is whether cheap-looking stocks might finally begin to outperform fast-growing ones. For now, hedge funds are continuing to bet on growth – but not quite as aggressively as they have been in the past.

Source: Goldman Sachs
Source: Goldman Sachs

💡 The takeaway: Small-scale retail investors have been betting big on value and cyclical stocks. If a major rotation away from growth stocks does indeed come to pass, the pros may risk another WallStreetBets moment – with retail investors ahead of the curve on an investment trend.

3️⃣ Riding the SPAC wave

Hedge funds have so far been rewarded for buying into the “special-purpose acquisition company” (or SPAC) boom. Goldman counted 15 SPACs owned by several stock-picking specialist hedge funds, generating average returns of 48% over just the last two months.

💡 The takeaway: 144 SPACs have gone public this year, raising a combined $44 billion – already more than half the 2020 total. But hedge funds’ likely voracious appetite for those shares could soon wane, if this week’s sharp price correction for the prominent SPAK exchange-traded fund is anything to go by.

Why should I care?

Hedge funds matter: Goldman’s analysis looked at 820 of them – managing $2.8 trillion worth of stock market investments alone. That amount of buying (and shorting, and selling) power represents a market force to be reckoned with, and one whose thinking it may pay to be attuned to.

Given hedge funds’ reputation for moving faster than “long-only” buy-and-hold funds, any change of heart can send shockwaves through stock markets – both positive and negative. It’s worth bearing that in mind if you’re backing any hedge fund favorites: shifting sentiment could cause both rapid gains and dramatic drops in your portfolio.

Additionally, for all the differences between retail investors and hedge funds – most recently illustrated by last month’s short squeezes – there’s perhaps more common ground between them than many people realize. The image below illustrates that – and gives retail investors bragging rights, for now at least.

Source: Goldman Sachs
Source: Goldman Sachs


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Disclaimer: These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment advisor.

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