FAST FIVE: Hedge Funds Have Never Been More Concentrated Into The Same Handful Of Stocks
Following this initial observation, we would periodically urge readers to keep doing this simple trade year after year, which repeatedly proved to be the best source of alpha in a market that has become infatuated with beta, as none other than Bank of America confirmed in late 2019 when it showed that going long the most shorted names and shorting the most popular ones has continued to be not only the most consistently profitable, alpha-generating strategy, but that in 2019, the top 10 crowded stocks underperformed the 10 most neglected stocks by 23%, the most on record.
In addition to rising concentration within the average hedge fund portfolio, crowding in common positions across hedge fund portfolios also surged, matching the highest level on record as halpless hedge funds conferred with each other in mid/late March what they should be buying, and they all appear to have decided on the same handful of stocks.
No surprise then that Goldman's hedge fund crowding index now matches its previous high in early 2016: “as investors grappled with the largest economic collapse on record, they shifted further into already-popular large-cap secular growth stocks, boosting momentum strategies.
On the other hand, sensing a Fed bailout, hedge funds also cut net leverage by less, and stopped cutting at a higher level of exposure, than they did during other major market drawdowns in recent years.
The answer is a small subset of what hedge funds were concentrated in, namely the megacaps which form the backbone of Goldman's Hedge Fund VIP list.