Hedge Funds are taking off risk and preparing for a long stock-picking slog this year, according to a Goldman Sachs report which gives one of the clearest inside looks into the secretive industry.
“During the 4th quarter of 2009, hedge fund managers hit the brakes on the ‘risk-on’ mode after increasing risk appetite sharply since March 2009,” wrote Goldman’s David Kostin and the rest of his strategy team, in a note to clients this week. “The ‘V-Shape’ rebound in hedge funds re-risking slowed during the 4th quarter of 2009 as evidenced by trends in net long exposure, cyclical sector weightings, and overall equity ownership of fund portfolios.”
The S&P 500 is down slightly again this year amid a choppy, uncertain environment as investors wait for clarity on interest rates, the state of the American consumer and fear of global sovereign debt defaults. Federal Reserve Chairman Ben Bernanke testifies Wednesday before the House Financial Services Committee on monetary policy, but is unlikely to lay out a clear timeline on his rate-raising plans.
This year’s sluggishness follows a more than 60 percent surge by the S&P from a 12-year low hit last March. The gains were fueled by a heavy risk-taking trade by hedge funds, who bought financials, raw materials and consumer stocks in the belief that the global economy would be brought back from the abyss.
Karen Finerman, President of hedge fund Metropolitan Capital Advisors, agrees that it is going to be a tough churn this year where individual stock picks, rather than a large cyclical comeback bet will separate the winners from the losers in her industry.
Finerman, also a Fast Money trader, has been adding to her JPMorgan Chase position and also currently owns Google .
Joe Terranova, Chief Market Strategist for Virtus Investment Partners, has been taking off risk recently like the hedge fund group and adding to a position in JPMorgan Chase as well.
“Hedge fund re-risking slowed following large increases over 2009,” wrote Kostin. “13-f data suggest that hedge funds were net sellers of equity during the quarter and covered short positions to maintain a relatively flat net long exposure.”
The bank run by Jamie Dimon is near the top of Goldman Sach’s list of “50 stocks that matter most to hedge funds.” This hedge fund “VIP” basket contained in the report looks at the stocks that are in the top 10 holdings of the hedge funds that Goldman Sachs tracks. This basket of 50 stocks has outperformed the S&P 500 by 8.1 percent on a quarterly basis since 2001, according to Goldman.
New additions to the list last quarter include Wells Fargo , Mead Johnson Nutrition , Merck and Target , another name favored by Finerman.
Despite Apple remaining atop the most favorite stock list, hedge funds clearly lost favor with the technology sector as a whole at the end of last year.
“Hedge funds are underweight information technology for the first time since 2005,” according to the Goldman analysis, which looks at 627 funds with $621 billion in long positions and $361 billion of short positions.
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