Goldman Sachs told hedge fund clients this week to buy stocks that are unloved by their peers if they want any chance of beating them.
The reasoning behind this head-scratching, contrarian call, the firm said in a note, is that most stocks are moving in step with each other so the only way to generate alpha—return above the market's gain—is to buy the names other hedge funds don't own.
"We believe hedge funds can boost performance relative to the market and peers by focusing their research attention on the unowned stocks most likely to trade with high idiosyncratic risk," the note said.
Here's what they say to buy.
Goldman found these stocks this way:
"Our framework for identifying the stocks most likely to generate alpha suggests that the single-stock positions in the Russell 1000 with the most opportunity are unpopular with hedge funds. Our work separates the drivers of individual stock returns across macro and micro forces to identify which stocks are most affected by company specific drivers and are most likely to move independently from the market and their sectors."
Hedge funds could use the help this year. Goldman uses a metric called "dispersion" and finds the stock-picking environment right now is the worst in 25 years.
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Because of this, Goldman's portfolio of the most popular stocks among hedge funds is up just 4 percent this year, in line with the S&P 500.
Do you hate the stocks on this list? Goldman says hold your nose and buy.