An Influx Of Top Hedge Funds Are Buying Downgraded Tech Stocks

Some well-known hedge funds have lately returned to the sector that harmed their alpha the most last year—technology stocks—just in time to profit from the sector's ferocious rebound in the new year.

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Microsoft and Amazon are now among the best stocks to bet on as of the end of the fourth quarter thanks to Lone Pine Capital, a hedge fund founded by Stephen Mandel. During the fourth quarter, Philippe Laffont's Coatue Management considerably increased its shares in Alibaba, Microsoft, and Advanced Micro Devices. Meanwhile, Coatue more than doubled its stakes in Adobe and Meta Platforms.

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By the end of 2022, Seth Klarman of Baupost had more than doubled his interest in Alphabet, the parent company of Google, ranking it as his sixth-largest investment. Last quarter, Klarman also significantly raised his bets on Amazon and Meta.

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The Securities and Exchange Commission requires money managers with assets under the control of $100 million or more to report their long positions on a quarterly basis. Recent disclosures revealed their wagers for the end of 2022.

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During the Federal Reserve's relentless rate hikes, these large investors bought up stocks that were among the greatest losses of the previous year. The tech-heavy Nasdaq Composite had its worst year since 2008 in 2022, falling 33.1%. Exposure to information technology was the single biggest factor in the significant negative long alpha (-12.1%) that hedge funds experienced last year, according to Goldman Sachs.

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Technology stock prices quickly recovered in the new year. Since July, when it had its highest monthly performance, the Nasdaq has increased by more than 12%. Although Amazon saw a 15% increase in 2023, Meta saw a 43% increase. This year, AMD is up 21%.

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The sector's resilience emerged despite reports of thousands of jobs being slashed as businesses get ready for a slowdown or maybe a recession. Yet, many investors viewed the wave of negative news as a good stimulus for the stocks since job cuts might help boost business profitability.

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Overall, hedge funds were able to dramatically outperform the market. According to Goldman, the group suffered an average loss of just 1%. The significant positive short alpha (+6.9%), which constituted the strongest year in Goldman's history, was what drove the outperformance.

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David Einhorn of Greenlight Capital had one of his greatest years ever with a stellar return of more than 30%, in large part due to his short positions in a number of cutting-edge technology companies like those favored by growth investor Cathie Wood.