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Hedge funds' favorite stocks are getting smoked

Trader on the floor of the New York Stock Exchange.
Lucas Jackson | Reuters
Trader on the floor of the New York Stock Exchange.

The smart money is losing in 2015.

Goldman Sachs' newly published hedge fund monitor report shows the stocks most loved by the funds have been crushed over the last three months by the most since the financial crisis.

"From July through October, hedge fund favorite stocks posted their worst relative returns outside of 2008. Our Hedge Fund VIP list of the most popular long positions underperformed the S&P 500 by 720 bp during that three-month window (-8 percent versus -1 percent)," Goldman's Ben Snider wrote in a note to clients Monday.

The Goldman VIP (very important positions) list consists of the top 50 most popular hedge fund long positions from the firm's analysis of 667 hedge funds with $884 billion of equity assets.

After beating the market mightily the previous three years, the VIP list is underperforming the S&P 500 by 5 percentage points in 2015.

Some investors say it is becoming increasingly important to be cognizant of hedge fund ownership in positions.

"More than ever before, investors have to focus on who else owns their holdings. When stocks are overowned by hedge funds (aka hedge fund hotels), especially as a percentage of the float, things can unravel rather quickly. Many funds have quick triggers which leads to large stock declines in short time periods," Aron Pinson, chief investment officer of LPS Financial, wrote in an email.

Snider states health-care stocks drove 70 percent of the Goldman hedge fund VIP list underperformance.

The health-care sector sold off precipitously on poor financial results and guidance from hospitals and managed care companies.

Community Health Systems sparked worries about weaker volume, slowing pricing growth and rising labor costs in the sector when it closed down 35 percent on Oct. 22 after a surprising negative earnings preannouncement.

Valeant Pharmaceuticals plunged 64 percent from August to October on questions concerning its drug pricing business model and allegations of illegal business practices at a related specialty pharmaceutical distributor.

All isn't lost however for hedge funds. Although the long positions of hedge fund portfolios are suffering, Snider's report shows the smart money is beating the market on the largest short positions.

Here are the top shorted names from the Goldman report and why they are working..

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