What's Next Amid Hedge Funds' Most Crowded US Equity Bets in 22 Years?
Since the end of October, the US stock market has experienced a sharp rebound driven by optimism about a soft landing for the US economy and the end of interest rate hikes by the Federal Reserve. The resurgence of investor interest in large-cap tech stocks with reliable earnings growth propelled the $NASDAQ 100 Index(.NDX.US$ to a new high for the year, surging 13.3% from its October low, outpacing the $S&P 500 Index(.SPX.US$'s gain of 10.6%.
Goldman Sachs' latest research reveals that the top hedge funds have been increasing their exposures in popular stocks such as the 'Magnificent 7', leading to the most crowded US stock bets in 22 years. The level of hedge fund herding has reached a new high, worse than ever before.
According to Goldman Sachs strategists including Ben Snider, hedge funds are riding the momentum of tech stocks while also exploring opportunities for profit in the weight-loss drug industry.
1. Hedge Funds Hold Highest Concentration of US Equity Bets in 22 Years
After analyzing the 13-F filings of 735 hedge funds with a total asset value of $2.4 trillion, Goldman Sachs has pointed out that hedge fund portfolios have experienced a surge in concentration to a record high in response to the increasing concentration of the stock market.
In Q3, Goldman Sachs' hedge fund crowding index reached a 22-year high due to increased investments in popular stocks. On average, hedge funds have 70% of their long portfolios in their top 10 positions, and large technology stocks continue to be the most favored bets. Seven tech companies now account for around 13% of hedge funds' long positions - twice the amount at the beginning of 2023.
2. Hedge Funds Return to Record Highs in Mega-Cap Tech Positioning
According to GS Prime Services data, US single stock hedge funds' net exposures to mega-cap tech stocks now rank in the 99th percentile since 2016. This is a significant increase compared to the beginning of 2023 when these positions only ranked in the 12th percentile based on historical data. BofA's data also reveals that short interest in Magnificent Seven has reached an all-time low.
Crowding Risk: While riding momentum may seem tempting, the size of hedge fund momentum exposures rarely reaches extreme levels. Following a strong rebound, the current RSI 14 of the Nasdaq 100 has reached 68.5, which is close to the overbought level of 70. This incredible momentum exposure, along with scarce contrarian stock trades and highly correlated stock movements, suggests that any reversal will likely be more drastic if it occurs.
Dan Wantrobski from Janney Montgomery Scott points out that the short-term charts for the S&P 500 are currently showing a negative divergence between price action, which is approaching recent highs in 2023, and momentum, which indicates lower highs.
"This is a sign that buying power is weakening even as the S&P looks to test into the low-4600 zone", Wantrobski further warns that markets are now vulnerable to profit taking/consolidation over the near-term and they are still vulnerable to elevated volatility/correction within the first half of 2024.
Risks of Federal Reserve Policy Uncertainty: The recent rebound of interest-rate-sensitive technology stocks was largely driven by expectations that the Federal Reserve would soon stop raising interest rates. However, the latest Federal Reserve meeting minutes reiterated the central bank's cautious attitude and indicated that changes in interest rates require more evidence before any significant action is taken. The Fed's indecisiveness on monetary policy could take time to be priced in by the market, leading to uncertainty and potential risks.
Risks of Performance or Earnings Outlook Not Meeting Expectations: The profitability of large technology stocks, whose share prices have surged this year, carries high expectations from both analysts and investors, leaving little room for "mistakes." On Tuesday, $NVIDIA(NVDA.US$, the world's most valuable chipmaker, reported financial results that surpassed market expectations in terms of revenue and net profit. However, the company's share price fell 6% in intraday trading after the earnings results, as its fourth-quarter revenue guidance fell short of the higher expectations of some Wall Street analysts and the company expressed concerns about sales growth in some regions. Therefore, the failure of performance or profit prospects to meet expectations is also an important risk currently faced by large technology stocks.
Source: Bloomberg, Financial Times, Reuters, Goldman Sachs
By Moomoo News Irene
Disclaimer: Moomoo Technologies Inc. is providing this content for information and educational use only.
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