Goldman says hedge funds' favorite stocks are going through their worst stretch on record

Published Mon, May 23 202210:59 AM EDTUpdated Mon, May 23 202212:58 PM EDT

A group of hedge funds' favorite stocks are having their biggest underperformance ever, leading managers to rotate out of their growth darlings and into cyclical companies, according to Goldman Sachs. The Wall Street firm analyzed the holdings of 799 hedge funds with $2.4 trillion of gross equity positions at the start of the second quarter based on regulatory filings. It then compiled a basket of the most popular long positions, dubbed Goldman's "Hedge Fund VIP basket," consisting of 50 stocks that most frequently appear among the largest 10 holdings of hedge funds. The basket has trailed the S & P 500 by 28 percentage points since early 2021, marking its worst stretch on record, Goldman said. The underperformance came as growth-oriented stocks became the epicenter of 2022's market sell-off in the face of rising interest rates. The Federal Reserve raised its benchmark interest rate by half a percentage point earlier this month, the most aggressive step yet in its fight against a 40-year high in inflation. The monetary tightening only adds to a list of worries for investors, ranging from the war in Ukraine , the pandemic 's path in China and global supply chain issues. The tech-heavy Nasdaq Composite has been hit hard, down 27.4% year to date and off 30% from its record high, reached last November. The S & P 500 has fallen more than 18% this year. As of the end of the first quarter, many mega-cap tech stocks remained hedge funds' most loved holdings, including, Microsoft, Amazon , Alphabet , Meta and Apple. Given the poor performance, hedge funds continued to reduce exposures to growth stocks, Goldman said. In fact, fund exposure to information technology and consumer discretionary companies is now at the lowest levels in at least a decade, the bank noted. "Rising real interest rates and declining leverage have weighed in particular on the valuations of long-duration stocks with extremely high multiples," Ben Snider, equity strategist at Goldman, said in a note. Meanwhile, hedge funds rushed to increase exposure to industrial and materials stocks, two sectors that have outperformed during a volatile 2022. The S & P 500 industrial sector is down 14% this year, while the materials grouping has fallen about 8%. TransDigm Group , Fortive and Reliance Steel & Aluminum were some names in these sectors that saw concentrated hedge fund ownership last quarter, according to Goldman.