Goldman Explans Why Hedge Funds Got Crushed In 2016
By Tyler Durden
It all started about three years ago when we first advised readers who were inclined to so gamble, that the only way to win in a rigged, maipulated market, one in which central bankers are now Chief Restructuring Officers and will not allow even a modest correction to asset prices, that the easiest way to generate “alpha” was to go long the most hated names.
Then, in mid-February, just as the market had bottomed and was about to unleash a historic short squeeze, we had a follow up article, in which we explained in very simple terms “how to outperform most hedge funds in 2016.”
The answer is simple: as we have said on many occasions in the past year, simply do the opposite of what hedge funds are doing. As the market rotated away from momentum and popular positions, the stocks least owned by hedge funds soared. Goldman’s Low Concentration Basket (GSTHHFSL) consists of the S&P 500 firms with the smallest share of market cap owned by hedge funds. This strategy has posted a mediocre historical performance record, outperforming the S&P 500 in 53% of quarters since 2001. This year, however, the basket has outperformed the S&P 500 by 541 bp (0% vs. -6%) and outperformed by nearly 9 pp during the past six months, equating to its strongest six-month return outside of 2008 and 2002. Investors who believe hedge funds are wrong and will remain directionally wrong and who wish to own equity risk but remain relatively insulated from the volatility caused by changes in hedge fund positioning should find this basket attractive. New constituents include ORCL, CVX, and UPS.
In other words, go long the Least Concentrated and/or Most Shorted by hedge funds, stocks. We also said to avoid (or simply short for those who prefer pair trades) hedge fund clustered positions, best represented by such indexes as Goldman’s Hedge Fund VIP List (GSTHHVIP): “clustering has become endemic for hedge funds, who having run out of alpha-generating ideas have all rushed into the same positions, and nowhere is this more visible than in the hedge fund exposure to FANGs, which has been the key reason for disappointing hedge fund performance.”
Here is a visual snapshot of how this trade has performed in the recent past:
As of this moment, the HF VIP basket – i.e., the most widely held stocks among the hedge fund world – is trading at 5 year lows, while the Low Concentration basket is at all time highs. In other words, anyone who had done as we suggested three months ago, would have indeed outperformed about 95% of all hedge funds in 2016. We bring attention to this out mostly to those who seems to be left with the erroneous impression that this website pushes some “short stocks” agenda and is bearish no matter what.
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Which brings us to today when the always so insightful, if only in retrospect, explains why hedge funds have had such an abysmal …read more
Source: Goldman Explans Why Hedge Funds Got Crushed In 2016
