The widespread rotation from growth to value has been well-publicized over the last two years, but it seems the trend was short-lived. Analysis of the 13F filings from the largest hedge funds reveals a rotation from value back to growth. However, funds remain more tilted toward value than they have on average over the last several years.
From value back to growth
In its latest "Hedge Fund Trend Monitor," Goldman Sachs observed the rotation from value to growth in both sector-neutral factors and sector rotations. For example, hedge funds were net sellers of energy and materials but net buyers of information technology and consumer discretionary.
The firm also reported that the long/ short performance of the most popular long positions among hedge funds compared to the largest shorts has become "exceptionally correlated" with both the growth and size factors. On the other hand, the correlations have been "extremely negative" with momentum and common quality factors like high returns on capital and low volatility.
According to Goldman, hedge funds have become more sensitive to market beta than would be expected with their below-average net leverage due to the compositions of their portfolios. The firm explained that tilting toward growth stocks and away from defensive factors has created an "exceptionally high" correlation between the most popular hedge fund stocks and the S&P 500.
Goldman said that correlation has stood at 0.6 over the previous three months versus the average of 0.3 over the last 10 years and 0.1 over the last 20 years. Of course, it should be noted that the most popular stocks include several big tech names that consist of sizable weightings in the S&P.
Sector rotations among hedge funds
According to Goldman's analysis, hedge funds had the largest net exposure to the information technology sector at 21%. However, the sector was also the largest underweight among hedge funds at -458 basis points. Just as interestingly, industrials represented 14% of funds' net exposure while being their largest overweight at 559 basis points relative to the Russell 3000.
Usually, tilts among hedge funds and mutual funds are in the same direction, but Goldman reported that financials and communication services were the two exceptions during the second quarter. Mutual funds were overweight on both sectors, while hedge funds were net underweight relative to the Russell 3000.
Aside from the rotation from value back to growth, Goldman Sachs also highlighted another reversal between the first and second quarters. Hedge funds slashed their position in energy by 279 basis points and in materials by 218 basis points.
Meanwhile, they boosted their exposure to information technology by 563 basis points, the largest change of any sector. Four of the additions to Goldman's "Hedge Fund VIP" basket were tech stocks: Advanced Micro Devices, PayPal, Atlassian and Elastic.
Two energy stocks added to the basket earlier this year, Occidental Petroleum and Valaris, fell out of it during the second quarter.
Digging deeper into the sector rotations
Hedge funds boosted their exposures to several industries within information technology, adding to their net exposures to industries where they were both overweight and underweight. For example, hedge funds were overweight in application software and underweight in tech hardware and semiconductors, but they added to all three industries.
Fund managers also added to their overweight in biotechnology but slashed their exposures to pharmaceuticals, which fell from overweight to underweight.
According to Goldman, a sizable chunk of the increased tilts to information technology and consumer discretionary sectors came within Big Tech. NVIDIA, Apple and Atlassian drove the increased exposure to information technology, while Tesla and Amazon boosted the increased exposure to consumer discretionary.
However, the firm added that many smaller companies also contributed to the shifts in exposure. Goldman found that Adobe Systems was the only one of the 15 information technology stocks with the largest increases in popularity during the quarter that had a market capitalization above $50 billion.
The 10 information technology stocks with the largest increases in popularity during the second quarter were: Arista Networks, NCR, Skyworks Solutions, Tyler Technologies, ANSYS, Amphenol, Adobe, OLED, Switch, and Avalara.
Hedge funds also continued to cut their exposures to communication services, shifting to their smallest net tilt over the last 10 years. Meanwhile, their overweight in industrials is close to their largest exposure to the sector in the last 10 years, exceeded only in this year's first quarter.
