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Hedge funds are showing less evidence of the chase in performance seen in the first half of the year, according to BofA Securities.
They are also now near an all-time low when it comes to cyclical stocks vs. defensives and beta exposure “is well below average, and Value remains deeply underweight and historically cheap vs. Growth.”
“We analyze hedge fund managers’ positioning in the S&P 500 stocks by aggregating their long positions reported through the 13F filings, and by estimating their short positions based on exchange-reported data,” strategist Savita Subramanian wrote in a note. “We estimate that hedge funds account for 85% of the total short interest.”
Real Estate (XLRE) has seen the largest increase in short interest from hedge funds this year and is the most shorted sector, Consumer Discretionary (XLY) is the second-most shorted sector, followed by Industrials (XLI).
Communication Services (XLC) has seen the biggest rise in net relative exposure. But it trails Materials (XLB) as the sector with the most exposure. Industrials (XLI) is also in third place here.
“The Magnificent 7 drove 100% of S&P 500 (SP500) (NYSEARCA:SPY) (IVV) (VOO) returns from the start of the year until the end of May resulting in massive outperformance of the cap-weighted index,” Subramanian said. “The rally has broadened since May, with the M7’s contribution just 30% (in line with its weight) and >50% of stocks ahead of the index.”
“Breadth is a positive for active funds (> chance of picking a winner) but elevated positioning in the M7 is a risk.”
Long-only active funds broadly hold Microsoft (MSFT), Nvidia (NVDA), Amazon (AMZN), Apple (AAPL), Alphabet (GOOG) (GOOGL), Meta (META) but not Tesla (TSLA), while Apple and Tesla are the only underweights.
Hedge fund short exposure to the Magnificent 7 has “dropped precipitously since the beginning of the year.”
Here are the most and least favored hedge fund stocks.
Stocks most overweighted by hedge funds:
- Incyte (INCY), net relative HF weight to S&P 500 weight 32.08
- Bath & Body Works (BBWI), 28.04
- TransDigm (TDG), 17.27
- Lamb Weston (LW), 12.83
- Bio-Rad Labs (BIO), 12.81
- Invesco (IVZ), 12.73
- Universal Health Services (UHS), 11.07
- Seagate Technology (STX), 10.52
- Caesar’s Entertainment (CZR), 10.38
- Baxter International (BAX), 10.20
- PTC (PTC), 9.85
- Targa Resources (TRGP), 9.83
- Expedia (EXPE), 9.77
- Pentair (PNR), 9.20
- Qorvo (QRVO), 9.15
- Howmet Aerospace (HWM), 8.97
- VeriSign (VRSN), 8.77
- Fair Isaac (FICO), 8.76
- Activision (ATVI), 8.64
- Hilton (HLT), 8.56
Stocks most underweight by hedge funds:
- Paramount Global (PARA), -12.21
- Ralph Lauren (RL), -12.12
- C.H. Robinson (CHRW), -8.61
- Extra Space Storage (EXR), -7.95
- CarMax (KMX), -7.90
- T. Rowe Price (TROW), -7.29
- Zions Bancorp (ZION), -6.54
- Tractor Supply (TSCO), -5.67
- Whirlpool (WHR), -5.44
- Digital Realty Trust (DLR), -5.43
- Norwegian Cruise Line (NCLH), -5.09
- Pool (POOL), -5.01
- Carnival (CCL), -4.14
- Ceridian HCM (CDAY), -4.12
- Franklin Resources (BEN), -4.06
- Albemarle (ALB), -3.95
- Occidental Petroleum (OXY), -3.9
- Expeditors International (EXPD), -3.72
- Royal Caribbean (RCL), -3.70
- Iron Mountain (IRM), -3.63
