market folly

Goldman Sachs is out with their latest hedge fund trend monitor report and they've highlighted some key takeaways from the slew of fourth quarter SEC filings and portfolio disclosures. Focusing on hedge fund exposure to equities, they note a broad trend of rotation into industrials and out of information technology. Goldman interestingly notes that this is the first time since 2005 that hedge funds are underweight IT.

Now, let's dive into the good stuff.

Here's a list of Ten Stocks That Most Frequently Appear In Hedge Funds' Top Holdings:

1. Apple (AAPL)
2. Pfizer (PFE)
3. Bank of America (BAC)
4. Google (GOOG)
5. JPMorgan Chase (JPM)
6. Microsoft (MSFT)
7. Mastercard (MA)
8. DirecTV (DTV)
9. Wells Fargo (WFC)
10. CVS Caremark (CVS)


Also, we wanted to highlight the Top 10 Stocks Added Most By Hedge Funds In Q4:

1. Mead Johnson Nutrition (MJN)
2. Wells Fargo (WFC)
3. Citigroup (C)
4. Amazon (AMZN)
5. 3Com (COMS)
6. Hewlett Packard (HPQ)
7. Wellpoint (WLP)
8. Black & Decker (BDK)
9. CVS Caremark (CVS)
10. Jefferies (JEF)


This is pretty much right in line with what we've seen when we've detailed hedge fund portfolios as we've noticed prominent managers picking up shares of MJN, WFC, and CVS in particular.

Based on various short disclosures, Goldman has also estimated what short positions a 'typical' hedge fund would employ. This hypothetical portfolio would be short the likes of Haverty Furniture (HVT), Lifeway Foods (LWAY), Great Southern Bancorp (GSBC), Travelzoo (TZOO) and many other names.

In their trend monitor report, Goldman concludes the same thing we've detailed previously: that hedge funds have recently de-risked, having spent the vast majority of 2009 re-risking before that. Some other research we've looked at has even indicated that hedge funds have their lowest net long equities position since May 2009. Also, an interesting tidbit from Goldman's research: they conclude that hedge funds use exchange traded funds (ETFs) as a hedging tool, rather than for directional bets.

Probably the most intriguing thing to note from Goldman's research is their conclusion regarding the impact of timelag in these position disclosures. Goldman writes, "Importantly, we believe our analysis of December 31 hedge fund holdings based on filings made in mid-February is probably more reflective of actual current holdings than many market participants are inclined to believe. Hedge fund holdings turnover is lower than most expect, as highlighted previously. Most securities (68%) that were in hedge fund portfolios on September 30, 2009 also appeared in portfolios on December 31, 2009. Because the overall holdings picture was surprisingly constant, it is reasonable for us to believe the most recent holdings data is not so 'out-of-date' as some might suggest."

They also draw attention to an obvious fact: hedge fund returns are largely reliant on the performance of a few stocks, usually their top holdings. This is why we like to track concentrated funds on the site even more, as their holdings are typically higher conviction plays. There are many investors out there in hedge fund land, and when it comes to equities, you have to know who to track. This is something we strive for on a daily basis as we've compiled a great list of hedge funds to track.

Below you will find Goldman Sachs' entire hedge fund trend monitor report as an embedded document. RSS & Email readers will need to come to the site in order to read it:



Overall, an impressive set of in-depth research well worth the read. And, importantly, their conclusions and findings fall directly in line with what we've discovered in our constant hedge fund coverage. The essential non-issue of the timelag between the portfolio disclosure date (12/31/09) and the date when the filings are released to the public (2/15/10) is very notable. When following hedge fund movements, you have to focus on their core positions and ideally you want to trail equity funds that have long-term time frames, typically employ value strategies, and run concentrated portfolios. To see what specific positions prominent hedge funds are buying, head to our hedge fund portfolio tracking series and our coverage of hedge fund investor letters.