Timely rotations help hedge funds navigate summer volatility: Goldman Sachs

In its latest “Hedge Fund Trend Monitor” report published Tuesday, Goldman Sachs highlights how timely rotations by hedge funds have helped them successfully navigate recent bouts of market volatility.

During the first half of 2024, hedge funds made significant positioning adjustments, particularly in the "Magnificent" mega-cap stocks, trimming their exposure even as these stocks continued to outperform. Notably, Apple (NASDAQ:AAPL) and Amazon (NASDAQ:AMZN) were exceptions, with hedge funds increasing their stakes in these companies.

These moves, according to Goldman Sachs, lowered the Hedge Fund Crowding Index and helped funds mitigate the impact of the subsequent volatility that arose from a rotation away from mega-caps, which later evolved into a sharp cyclical-led selloff in early August.

The bank reveals that US equity long/short hedge funds have returned 9% year-to-date, outperforming broader market indices. The Hedge Fund VIP list, which tracks the most popular long positions, has delivered a 19% return, despite a 10% market selloff in July. This list includes stocks like Microsoft (NASDAQ:MSFT), Meta Platforms (NASDAQ:META), and Alphabet (NASDAQ:GOOGL), which remain central to hedge fund portfolios.

“Today, with the S&P 500 close to its high, hedge fund net and gross exposures register above 5-year averages but below levels carried before the selloff,” Goldman notes.

In another timely shift in the second quarter, hedge funds halted a rotation toward cyclicals that had begun in mid-2022.

Specifically, funds have moved their overweight position to Health Care, now the best-performing sector during the recent downturn relative to the Russell 3000. At the same time, they increased exposure to Industrials and Financials while reducing holdings in Consumer Discretionary and Information Technology.

According to the note, this was the first time hedge funds lifted Financials to overweight since 2010.