Six out of 10 largest holdings in over 700 aggregated hedge fund portfolios are increasingly concentrated towards the ‘Magnificent Seven’ stocks, with Tesla being the sole exception, according to the latest report by Goldman Sachs.
Harbingers of Market Reallocation: Insights from Goldman Sachs’ Hedge Fund Trend Monitor, an analysis led by Ben Snider, show an overzealous preference for just several mega-caps. This enthusiasm does not mirror their market weight. The Magnificent Seven accounts for a record 13% of the aggregate hedge fund long portfolios. Yet, it remains significantly underweighted compared to a 26% collective stake in the Russell 3000 — underscoring a cautious approach towards mega-cap equities.
The concentration within hedge fund portfolios rose further, with 70% of their long positions allocated to their top 10 holdings. According to analysts, this rising concentration is partly driven by confidence in specific industries, such as artificial intelligence and healthcare.
The latter experienced notable enthusiasm for innovations such as GLP-1 therapies. As a result, Eli Lilly and Company LLY entered the top 20 holdings favored by hedge funds.
The analysis also revealed a record tilt towards the momentum factor within hedge fund long portfolios, marking the most substantial growth orientation since 2016.
“While trimming exposure to mega-cap tech, hedge funds looked for new alpha in cyclicals and other pockets of growth. Alongside strong U.S. economic data and hints of improvement in the global manufacturing cycle, funds lifted their tilt to cyclical industries versus defensives to the highest since 2016,” Goldman Sachs wrote.
Information Technology remained the largest hedge fund net sector weight at the start of Q1 2024, representing 21% of total net exposure but nonetheless registered the largest “underweight” relative to the Russell 3000 (-587 basis points). Health Care remained the largest overweight (+693 basis points).
Rising and Falling Stars: APi Group Corporation APG, General Electric Co. GE, and Union Pacific Corporation UNP joined the so-called Goldman Sachs’ ‘VIP list’ of the most popular hedge fund positions for the quarter.
Microsoft Corp. MSFT, Apple Inc. AAPL, and NVIDIA Corporation NVDA ranked among the Information Technology stocks with the largest net decreases in hedge fund popularity, also known as ‘Falling Stars’.
In contrast, hedge funds added exposure to Communication Services across most subsectors, led by The Walt Disney Company DIS, Snap Inc. SNAP, and Roblox Corporation RBLX.
Hedge funds also increased length in cyclical industries, including Financials; Progressive Corporation PGR, Arch Capital Group Ltd. ACGL, Kemper Corporation KMPR, Oyster Point Pharma, Inc. OYST, and Morningstar, Inc. MORN screened among this quarter’s Rising Stars.
Other cyclical ‘Rising Stars’ were Arrow Electronics Inc. ARW, The Mosaic Company MOS, Packaging Corporation of America PKG, Sealed Air Corporation SEE, Synopsys Inc. SNPS, and Veralto Corporation VLTO.
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