Hedge Funds' Recent Purchases And Sales

During last year's fourth quarter, hedge funds tilted towards growth sectors and away from cyclical and value-oriented areas, ensuring a solid start to 2023. GrowthRAG -1.55% has added more than 7% to the Russell 3000 year to date, versus value's 2% gain.

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This past week, Goldman Sachs strategist Ben Snider wrote an article titled "Funds increased their net tilt towards Consumer Discretionary by (3.3 percentage points) the largest increase of any sector in the fourth quarter, as well as increasing exposure to Communications Services and Information Technology." According to the report, hedge funds shifted their net tilt away from Energy, Industrials, Materials, and Financials.

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There was a particularly strong selling activity in energy stocks during the fourth quarter, with hedge funds reducing their tilt to the sector by 2.2 percentage points in a collective move. The investment group returned over 60% in 2022, only to decline by nearly 4% this year, after returning more than 60% last year.

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Regulatory forms known as 13-F are required by hedge funds to be filed with the Securities and Exchange Commission within 45 days of the end of each quarter. This year's Goldman review includes holdings of 758 hedge funds worth a combined $2.3 trillion.

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There is no doubt that growth stocks have become more popular among hedge funds in recent years, but healthcare has been their greatest collective overweight by comparison to the Russell 3000. The sector accounted for around 20% of hedge fund holdings at the end of 2023, compared to 15% in the benchmark index. The Industrials sector, with about a four-percentage-point overweight, remains in second place despite paring positions in the fourth quarter.

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Almost 21% of hedge funds' holdings are in tech stocks, compared to the Russell 3000's 24%. Consumer staples are underweighted by four percentage points compared to the index.

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Activision Blizzard (ATVI), a merger-arbitrage play, was the top new buy among individual stocks in the fourth quarter based on the number of hedge funds holding the stock. Several hedge funds are betting that the videogame maker's shares will be able to close the gap with Microsoft (MSFT), which has agreed to pay $95 per share for the videogame maker's shares. Amid antitrust scrutiny in the U.S. and abroad, Activision shares traded in the $70s in the fourth quarter, as the deal continues to face antitrust scrutiny.

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A few other top hedge fund buys in the last three months of 2022, a group that Goldman Sachs analysts call the "Rising Stars," were Coupa Software (COUP), Dominion Energy (D), DocuSign (DOCU), and Dick'perform their sector by an average of 0.59 percentage point in the following quarter, according to Goldman.

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Reverse trades have also worked: Stocks with the greatest decline in hedge-fund shareholders in a quarter have lagged their sector peers by 0.60 percentage points. Among the "Falling Stars" in the fourth quarter were Alnylam Pharmaceuticals (ALNY), Home Depot (HD), JPMorgan Chase (JPM), Microsoft, and Amazon.com AMZN -2.89%  (AMZN).

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Goldman's "Hedge Fund VIP" basket, which includes stocks often found in hedge funds' top-10 holdings, still lists the latter two stocks as its top two. Besides Microsoft and Amazon, there are five other familiar names: Meta Platforms (META), Alphabet (GOOGL), Visa (V), Uber Technologies (UBER), and Apple AAPL –2.05%  (AAPL).

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All of those stocks have been strong lately-only Alphabet has lagged behind the market.

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