These Are The Top 20 Hedge Fund Long And Short Positions

Nearly six years ago, back in 2013, we presented what we then viewed (and still view) as the best trading strategy of the New Abnormal period, when we said that buying the most hated/shorted names while shorting the names that have the highest hedge fund and institutional ownership is the surest way to generate alpha, to wit:

... in a world in which nothing has changed from a year ago, and where fundamentals still don't matter, what is one to do to generate an outside market return? Simple: more of the same and punish those who still believe in an efficient, capital-allocating marketplace and keep bidding up the most shorted names.

Fast forward to today, when Bank of America confirms that, with just one exception, the historically unvolatile 2017, this strategy has continued to be consistently profitable, as "over the last several years, buying the most underweight stocks by large-cap active funds and selling the most overweight stocks by large-cap active funds has consistently generated alpha." This is shown in the chart below which reveals that buying the 10 most underweight stocks and selling the 10 most overweight stocks by active funds has generated alpha every year in the past five except 2017.

(Click on image to enlarge)

And despite the market's torrid gains in January, this strategy continued to generate profits even in 2019, because after another year of near-record active outflows from active funds(~$370bn), this trend persisted in January, generating an annualized spread of 5ppt according to BofA.

So with institutional ownership seemingly a liability for one more year, we decided to take a look at which sectors are most exposed to hedge fund ownership.

Conveniently, overnight BofA equity and quant strategist Savita Subramanian put together her latest analysis looking at "what your neighbors are doing", i.e., where active fund managers are most concentrated. She found that the two consensus picks are Communication Services (the "new TMT") which now carries the highest relative exposure at 1.26x in the average funds, and Health Care where almost two-thirds of funds are overweight the sector, the second most BofA has seen in the sector since 2015. In particular, HC Providers & Services industry is now a record overweight at 1.5x. Tech and Discretionary also carry modest overweights, as they have over the history of our data.

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