Hedge Funds Rebalance

Hedge funds shifted away from market-leading technology and health-care investments in the second quarter, as they added to bets on a cyclical recovery with larger positions in industrial and financial shares.

Within 45 days of the end of each quarter, hedge funds must report their holdings to the Securities and Exchange Commission on a regulatory form known as a 13F. In a recent study, a team of Goldman Sachs analysts compiled the holdings of 815 hedge funds that managed about $2 trillion as the third quarter began.

From the start of the year until Aug. 19, the S&P 500 rose 6% while the Nasdaq 100 added 30%. That’s much better than the average equity hedge fund in the Goldman Sachs analysis, which returned just 2% over the same period. But managers’ best ideas have beaten the S&P 500, with a basket of hedge funds’ top-50 holdings returning 18%.

On aggregate, hedge funds rotated out of technology and health care and into industrials and financials in the second quarter. That’s a wager on the unfolding cyclical recovery in the U.S. and global economies. It was also a move toward cheaper relative valuations in the market.

Health-care stocks remain the most concentrated holdings in hedge fund portfolios, at about 21%. That is also a greater weight than health care’s 14% in the Russell 3000 index of most U.S. stocks. But hedge funds reduced their combined tilt toward health care by about 3 percentage points last quarter.

Technology, which has grown to represent a whopping 26% of the Russell 3000, was hedge funds’ greatest relative underweight at the end of the second quarter at about 18% of their aggregate allocation. That tilt was down roughly 4 percentage points from the prior quarter. Hedge funds’ underweight to tech relative to the Russell 3000 is nearly the largest it has been over the past decade, according to Goldman Sachs.

While financials remained an underweight to the Russell 3000, hedge funds boosted their allocations in those stocks the most in the second quarter, followed by industrials, which became an overweight. The sectors represented 7.2% and 9.4%, respectively, of hedge-fund portfolios.

Other overweight sectors included consumer discretionary and communications services, while consumer staples was the largest underweight after technology.