- Hedge funds are piling back into their favorite stocks amid rising uncertainties in the stock market, according to Goldman Sachs.
- The bank analyzed holdings of 795 hedge funds with $2.4 trillion of gross equity positions.
- Amazon has supplanted Microsoft as the most popular long holding among hedge funds.
Hedge funds are piling back into their favorite FANG stocks amid rising uncertainties in the stock market as investors grapple with elevated inflation and a Federal Reserve that is still expected to raise interest rates.
Goldman Sachs analyzed the holdings of 795 hedge funds that hold $2.4 trillion in gross equity positions and found that the FANG and growth stocks have regained popularity among the professional Wall Street traders.
Specifically, Amazon has risen to the top to be the most popular holding among hedge funds, supplanting Microsoft. Meanwhile, Visa has displaced Apple from the top five most popular holdings among hedge funds, Goldman Sachs said.
Goldman's "VIP list" tracks the 50 stocks that appear most often among the top 10 holdings of fundamental-driven hedge funds. Over time, this basket of stocks has outperformed the S&P 500 in 59% of quarters since 2001, so it pays to follow any changes made to the list of stocks.
This time around, new entrants to the VIP list include AMD, Bank of America, MercadoLibre, Netflix, and PayPal, among others. And the changes are so far contributing to a rebound in performance, according to Goldman.
"The average equity hedge fund has returned -9% year-to-date but gained +4% since the start of July, aided by both the market rebound and the recent outperformance of growth stocks," Goldman said.
And hedge funds could still add more exposure to the market given that net leverage remains near the lowest levels since March 2020, as positioning remains relatively depressed. Additionally, while hedge funds have been adding back growth stocks, they are still more overweight on value stocks than average.
"Exposure data calculated by Goldman Sachs Prime Services show hedge fund net leverage that registers in the 27th percentile vs. the past five year and 11th percentile vs. the last three years," Goldman said.
One catalyst that could shift hedge funds' exposure to the market to more net long is a return of the IPO market, which has been virtually dormant in 2022 compared to 2021.
"If the equity market remains strong enough to incentivize more issuance, the additional equity supply could be partially bought by hedge funds and therefore serve to boost both hedge fund length and returns," Goldman said.