The end of Q3 was unique for investors in that while stocks had yet to suffer their post Oct. 3 tumble, when Fed Chair Powell infamously warned the Fed’s rate hikes may overshoot the neutral rate, it provided a glimpse of portfolio holdings just before the most violent stock market selloff in years. It also took place just before one of the worst periods for the hedge fund community whose concentrated positioning resulted in a dramatic hit to performance, sending the hedge fund space down 4% for the year…
…. as a result of handful of stocks widely held by most professional investors, the so-called Goldman Hedge Fund VIP basket.
… which as Goldman wrote overnight led to a “vicious downward cycle” between returns and leverage.
So what were the stocks that were the cause of so much pain and nightmares on Wall Street in the past two months, and which as of September 30 would lead to a violent plunge in the market just a few weeks later?
Below we show the 50 stocks that make up the Goldman “Very Important Positions” basket for hedge funds, and where not surprisingly, all 5 of the top 5 names were all tech stocks. While we have to wait until February 15 to see how these positions have changed in the current quarter, something tells us that tech is no longer Wall Street’s most beloved sector.
And obviously, if the most loved names were the source of steep losses, then it stands to reason that for yet another quarter, the most hated – or most shorted – stocks, were the source of substantial alpha, and sure enough that’s precisely what happened when on several occasions of vicious short squeezes, it was these names that soared even as the broader market continued its downward drift. Courtesy of Goldman, here are the 50 stocks representing the largest short positions:
Finally, here are the stocks that saw the largest change in popularity in Q3, i.e., the names with the largest increase and decrease in number of hedge funds owners.
Based on the above, our advice, as every other quarters, is simple: buy the most shorted names, short the biggest longs, and fade anything that the hedge fund sector has been rotating into while pairing that with long from the list of companies with the largest negative change in popularity. This “strategy” alone has generated positive alpha for all but one of the the past 14 quarters.
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