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Most Popular Hedge Fund Stocks Suffer Record Stretch Of Underperformance: Here’s Why

Most Popular Hedge Fund Stocks Suffer Record Stretch Of Underperformance: Here’s Why

Three months ago, we reported that according to Goldman…

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This article was originally published by Zero Hedge

Most Popular Hedge Fund Stocks Suffer Record Stretch Of Underperformance: Here’s Why

Three months ago, we reported that according to Goldman calculations, the first half of 2021 was the worst 6 months since the financial crisis, with the bank noting that “one factor weighing on hedge fund returns has been the extraordinarily weak performance of the most popular hedge fund long positions” coupled with continued strong gains by the most popular shorts, which served as a double whammy to hedge fund alpha.

Among the various reasons cited for the poor performance of long books was the collapse in Chinese stocks, very popular among hedge funds at the start of the year, which had been clobbered in 2021 as a result of Xi Jinping’s new “shared prosperity” drive and escalating crackdowns against whole sectors of the market which sent some of the most popular Chinese names into a tailspin.

Fast forward to this weekend, when Goldman’s Ben Snider writes in the bank’s latest Hedge Fund Trend Monitor report (which analyzes 799 hedge funds with $2.9 trillion of gross equity positions ($2 trillion long and $918 billion short) based on 13F filings as of Nov 15), that the pain extended for one more quarter, and as of Sept 30, “the most popular hedge fund long positions have suffered a record stretch of underperformance this year.” This comes at a time when according to HFR, the typical US equity hedge fund has returned just 13% YTD (Goldman Sachs Prime Services data show an average return of 11% YTD through October), roughly half the return of the broader S&P500, with nearly 10 percentage points of that return generated in the first four months of the year.

Specifically, since February, Goldman’s Hedge Fund VIP list of the most popular hedge fund long positions (GSTHHVIP) “has lagged the S&P 500 by 16 percentage points (+6% vs. +22%), exceeding the period in 2015-2016 as the basket’s worst on record.” As shown in the chart below, the Hedge Fund VIP list (GSTHHVIP) of the most popular hedge fund long positions has lagged the S&P 500 by 16 percentage points since February (+6% vs. +22%), exceeding the period in late 2015 and early 2016 as the worst stretch for the basket relative to the market in its history of nearly 20 years.

As discussed here in recent weeks, while hedge fund leverage remains elevated relative to history, it is below recent highs, suggesting funds were not fully prepared for the market rally at the start of 4Q. Aggregate hedge fund net leverage calculated based on publicly-available data registered 55% at the start of 4Q, above the historical average but below the 58% exposure at the start of 2021. Higher-frequency exposures calculated by Goldman Sachs Prime Services show hedge fund net leverage that peaked in June and now ranks close to the average level of the past 12 months, though still in the 80th percentile of the past three years.

Consistent with elevated hedge fund net leverage, and perhaps following the catastrophic – for shorts – Q1, short interest for the typical stock remains close to the lowest level on record. Short interest for the median S&P 500 stock declined from 2.2% of cap at the start of 2020 to 1.5% at the start of 2021 and has remained roughly stable since. This matches the degree of short interest during the Tech Bubble in 2000 as the lowest in at least 25 years. Short interest in every sector ranks below the 25-year average.

In retrospect, it’s a good thing hedge funds trimmed their short exposure: it’s no secret that while popular shorts generally underperformed the market during 3Q, they have rallied sharply in recent weeks, weighing again on hedge fund returns. In fact, according to Snider, a monthly-rebalanced basket of the most concentrated short positions (GSCBMSAL) lagged the Russell 3000 by over 20 percentage points between the end of June 2021 and the end of October (-16% vs. +5%). However, during the first week of November, the shorts jumped by 16%, outperforming by 13 pp. As we have frequently discussed over the past month, this surge was coincident with a rise in retail trading activity.

Drilling down into the pain, on a sector basis, concentrated shorts have created the most pain in the Consumer Discretionary and Materials sectors YTD. Portfolios of the most concentrated shorts in those sectors have dramatically outperformed both the most popular hedge fund positions and the aggregate sectors this year. In other words, for yet another quarter, going long the most popular shorts – something we first said in 2013 is the only winning strategy in this broken, manipulated market has been the best trade!

Adding insult to injury, in addition to the latest squeeze, at a factor level funds entered 4Q with their smallest Growth tilt since early 2015, but Growth has outperformed so far this quarter. Funds are typically tilted to Growth but began to rotate toward Value in mid-2020 as the economy and equity market began to rebound. Funds temporarily shifted back to Growth in 2Q 2021 but resumed their rotation to Value during 3Q. Since the start of 4Q, Goldman’s sector-neutral, long/short Growth factor (GSMEFGRO) has returned 4% and the Russell 1000 Growth index has outperformed the Value index by 7%.

Here it’s worth noting that while hedge funds took down their overall market exposure in Q3, retail investors did the opposite, and as Snider notes, one reason short interest has declined so dramatically is the still-elevated degree of retail trading activity in the equity market. After surging in late 2020 and early 2021, retail trading activity appeared to stabilize this summer but has risen again in the last several weeks, particularly in call options. Since early last year, changes in retail trading activity have been reflected in the performance of the most popular retail stocks as well as in the stocks with the most concentrated short interest. During the last few weeks, as retail trading activity increased, a basket of the most concentrated short positions (GSCBMSAL) rallied by 16% vs. 4% for the Russell 3000.

The chart below shows the top 30 Russell 3000 stocks based on the estimated retail share of trading volume during the past month. As before, the stocks in this list generally carry higher short interest than the typical Russell 3000 stock. Of these 30 stocks, only AMD and NVDA are constituents of the Hedge Fund VIP list. We will have more to say on the retail most popular/most shorted stocks in a subsequent post.

Still, before you cry for hedge funds, it’s worth noting that they are now suffering the consequences of their own greedy actions. As Goldman notes in its HF tracker, “surprisingly, while hedge funds rotated long portfolios toward Value during 3Q, they also lifted the weight of high-multiple growth stocks to a new record.” In other words, they took the barbell trade to absolute extremes, betting on deep value and extremely overvalued, high growth names. While stocks with EV/sales ratios over 10x account for 23% of Russell 3000 market cap, they account for a third of US equity hedge fund long portfolios in aggregate, up from 31% at the start of 2021 and 16% at the start of 2020. That said, funds slightly trimmed their exposure to stocks with EV/sales multiples over 20x.

While it’s obvious by now, Snider explains that “extremely low interest rates [i.e., thank you, Fed] and investor focus on future growth have created a large premium for stocks with very fast revenue growth without regard for the profitability of those companies. The average Russell 3000 stock with consensus 2023 revenue growth greater than 20% and a profit margin over 20% trades at 11x FY2 EV/sales, roughly the same multiple as a stock with 20%+ growth but low or no profitability.”

Goldman cautions that while many of these high growth, low profit companies have attractive outlooks, the dependence of their current valuations on long-term future cash flows makes them particularly vulnerable to the risks of rising interest rates or disappointing revenues. The outperformance of highly profitable growth stocks this year, particularly during 1Q when real interest rates jumped, underscores their attractiveness relative to growth stocks with low profitability.

As mentioned above, a key reason for hedge fund underperformance in Q3 was the continued aversion to all things Chinese. While prices of US-listed China stocks generally stabilized in recent months, during 3Q hedge funds cut their exposures to the stocks to the lowest level since late 2018. China ADR share prices declined by more than 50% between mid-February and late August. The drop weighed on the returns of hedge funds, which entered 3Q 2021 with the largest exposure to China ADRs on record. The share of US hedge funds in Goldman’s sample with a long position in at least one China ADR registered 33% entering 3Q but dropped to 25% by the start of 4Q as prices fell and funds cut exposure.

Turning attention to portfolio construction next, Goldman finds that hedge fund portfolio concentration rose modestly in 3Q 2021 but still remains far below pre-COVID levels. The typical hedge fund holds 64% of its long portfolio in its top 10 positions, slightly above the historical average but well below the 70% share at the end of 1Q 2020 – this underscores the importance of VIPs for overall hedge fund returns. Unlike the slight increase in concentration within hedge fund portfolios, crowding across hedge fund portfolios remained flat in the quarter; that said, Goldman’s crowding Index remains near the record highs of early 2016 and 2020.

Amid the relentless market confusion of 2021 in general and Q3 in particular, portfolio paralysis has set in and as the net chart shows, portfolio position turnover continued its recent trend and declined in 3Q 2021. The average fund turned over 23% of distinct equity positions in 3Q, the lowest in at least 20 years. Turnover decreased in 10 of the 11 sectors with Consumer Staples the only exception.

Looking at sector exposure, as before, Info Tech represents the largest sector net exposure (24%) but a large underweight (-317 bp) relative to the Russell 3000. Health Care Tech represents 19% of funds’ net exposure and is the largest overweight (+553 bp). Hedge fund and mutual fund sector tilts are generally in the same direction, with Financials representing a notable exception: Mutual funds carry a large overweight in the sector, but hedge funds have a net underweight tilt relative to the Russell 3000. Consumer Discretionary is the other point of disagreement between hedge funds (overweight) and mutual funds (underweight).

While IT remains unloved, funds increased net tilts to Industrials by 128 bp, the largest change in any sector. The current 368 bp hedge fund overweight in Industrials is the largest tilt at any point since at least 2007. Unfortunately, the sector has underperformed the S&P 500 by 11 pp since May, but Goldman economists expect economic growth to reaccelerate from 2.0% in 3Q 2021 to 4.5% in 4Q 2021 and 1Q 2022, which should benefit the most cyclical pockets of the sector (we’ll see about that after another round of covid lockdowns in the US). Within Industrials, hedge funds added the most to Trucking and Electrical Components & Equipment. Six Industrials stocks currently screen into Goldman’s Hedge Fund VIP list: BLDR, INFO, KSU, TDG, UBER, WSC.

Finally, at the subsector level, hedge funds increased tilts to both secular growth and cyclical equities in 3Q. Funds added to tilts in Trucking, Autos, and Software while cutting exposure to Diversified Banks, Internet Retail, and Biotech.

The current fund tilts in Energy and Communication Services rank as nearly the smallest positions in the past decade. While the Energy tilt is very small relative to history, during 3Q funds moved from underweight to overweight the sector relative to the Russell 3000.

While professional subscribers have access to the full report in the usual spot, in a subsequent post we will drill down into the 30 most popular as well as 30 most hated/shorted names for those who wish to put on the most successful trade of the past decade – going long the most hated names and shorting the most popular basket.

Tyler Durden
Mon, 11/22/2021 – 07:24


Author: Tyler Durden

Economics

Are These The Charts That Spooked Jerome Powell?

#CKStrong Fed Chair, Jerome Powell finally admitted today there is too much stimulus demand (in the macro context) in the global economy and the Fed will…

#CKStrong

Fed Chair, Jerome Powell finally admitted today there is too much stimulus demand (in the macro context) in the global economy and the Fed will have to accelerate its tapering.

The following charts clearly illustrate the U.S. economy is overheating and a major contributing factor to inflation. Nominal retail sales and core capital good shipments remain 15 percent above and years ahead of their pre-COVID trend. Think of the trend line as the supply curve.

In hindsight, it is easy to say the global policymakers overshot with their stimulus, but it is certainly better than the alternative and a deep recession/depression.  Just as you and I, policymakers make decisions with imperfect information.  Counterfactuals don’t go a long way in the political arena.

We think it is about time the FOMC finally starts to focus on the problems caused by the “monetary supply chain,” rather than blaming the economic imbalances on “supply chain issues,” and it appears they have. If demand were not so strong, the supply chain issues would have worked themselves long ago, and the Port of Los Angeles and Long Beach wouldn’t look the 405 freeway during rush hour.   

As reflected in the charts below, the supply chain broke early during the pandemic as upstream suppliers were “bullwhipped” by the massive volatility in point-of-sale or end demand.

We believe the next inflection point, where the Fed keeps tapering and then tightening until something breaks, which leads to reversal and a new monetary regimes, is a long way off.

Stay tuned.



Author: macromon

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Economics

Financial Markets and Omicron and Powell

Five year inflation breakeven (unadjusted) down, 10yr-3mo term spread down, VIX and EPU up, and S&P 500 down. Figure 1: Five year inflation breakeven…

Five year inflation breakeven (unadjusted) down, 10yr-3mo term spread down, VIX and EPU up, and S&P 500 down.

Figure 1: Five year inflation breakeven (blue), ten year – three month Treasury spread (red), both %. Source: Treasury via FRED, and author’s calculations.

Ignoring adjustments for inflation risk term and liquidity premia, implied expected 5 year inflation is down to 2.8%, while growth prospects also revert back to September levels.

Figure 2: VIX (blue, left scale), and Economic Policy Uncertainty index (red, right scale).  Source: CBOE via FRED, policyuncertainty.com.

Risk and policy uncertainty are also at recent highs, but still are dwarfed by Trump era highs (83 for VIX at 27.2; 862 for EPU at 180 on 11/29).

Figure 3: S&P 500 index (blue, log scale). Source: S&P via FRED. 

Given this backdrop (lower expectations for growth and presumably profits, due to Omicron, and higher interest rates from Powell’s statement re: inflation persistence), it’s not surprising to see a drop in stock indices.




Author: Menzie Chinn

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Economics

Retailers Open Pop-Up Container Yards To Bypass Savannah Port Jams

Retailers Open Pop-Up Container Yards To Bypass Savannah Port Jams

By Eric Kulisch of American Shipper,

Overflow lots set up by large retailers…

Retailers Open Pop-Up Container Yards To Bypass Savannah Port Jams

By Eric Kulisch of American Shipper,

Overflow lots set up by large retailers this month as temporary staging areas for imported containers have helped bring down congestion levels at the Port of Savannah, and Georgia officials expect further efficiency gains with this week’s opening of two more port-sponsored pop-up sites.

The Georgia Ports Authority, in partnership with the Norfolk Southern, will start accepting loaded containers on Monday at the freight railroad’s nearby Dillon Yard and later this week will begin routing shipping units to a general aviation airport in Statesboro, located about 60 miles west of Savannah, Chief Operating Officer Ed McCarthy told FreightWaves.

Moving containers to off-port properties is part of the recently announced South Atlantic Supply Chain Relief Program designed to reclaim space at the Garden City Terminal, where container crowding is making it difficult for vessels to unload and for stacking equipment and trucks to maneuver. In October, Savannah handled an all-time record of 504,350 twenty-foot equivalent units for a single month, an increase of 8.7% over October 2020. The volume surpassed the GPA’s previous record of 498,000 TEUs set in March.

Port officials began testing the Dillon Yard and Statesboro locations last week after renting top loaders for stacking and truck transfers, installing computer lines in order to track containers entering the gate with radio frequency identification, and laying extra pavement at the rail facility, McCarthy said. 

Four or five more pop-up container facilities are scheduled to open around Georgia by mid-December and the port authority is talking with freight railroad CSX about an auxiliary storage site in Rocky Mount, North Carolina, the COO said in an interview. 

The sites are mini-versions of inland ports where containers are brought to strategically located sites by intermodal rail, shortening the distance trucks have to travel to collect imports or drop off exports and reducing traffic in and around busy seaports. The concept essentially brings the seaport closer to manufacturing, agriculture and population centers. 

The GPA currently operates a large inland intermodal rail terminal in Murray County, Georgia, as well as an inland dry bulk facility. Construction on a second inland rail link for containerized cargo in northeast Georgia is scheduled to begin in April and be completed by mid- to late 2024, spokesman Robert Morris said. South Carolina also operates two inland ports, Virginia has one in the northwestern part of the state and the Port of Long Beach in California recently launched an effort to quickly flow cargo to Utah for distribution by converting truck traffic to rail.

Several users of the Port of Savannah this month have opened pop-up yards of their own where they can directly flow import containers to avoid waiting for longshoremen to sort through shipping units for their cargo and then retrieve them when space opens at one of their distribution centers. Each of the private spillover yards can accommodate 2,000 to 3,000 containers. 

“We’re starting to see some of our customer base do their own pop-ups. They’re contracting with some folks who have capabilities in the Savannah region and … taking their long-term destiny in their own hands,” McCarthy said in an interview.

The Rocky Mount intermodal facility being discussed with CSX will probably be used as an alternative storage location for empty containers. It could be running by early December, the COO said. Whether containers are diverted from other locations or whether empties are loaded up in Savannah and sent there remains to be determined. 

The Biden administration, which is focused on alleviating a nationwide supply chain crisis that is creating product shortages and contributing to inflation, helped fund the GPA’s emergency storage yards by reallocating $8 million in federal funds. Additional flexibility recently granted by the Department of Transportation allows port authorities to redirect cost savings from previous projects funded by port infrastructure grants toward mitigating truck, rail and terminal delays that are preventing the swift evacuation of containers from ports.

White House port envoy John Porcari, the liaison between industry and the White House Supply Chain Disruptions Task Force, said the government is looking to create more inland ports. 

“We’re encouraging other ports to do the same [thing as Savannah.] I think you’ll see a generation of projects in the short term around the country that will help maximize the existing on-dock capacity through interior pop-up sites,” Porcari said on Bloomberg’s “Odd Lots” podcast last week. 

“The fundamental issue is that the docks themselves are such valuable pieces of real estate that you don’t want the containers dwelling there a second longer than you have to. You want to get them to the interior or back on ships to their target markets overseas,” he said.

Better Fluidity

Improvements in rail handling, a dip in import volumes in line with seasonal patterns and the customer pop-up yards have combined to improve cargo flow and reduce the number of ships waiting for a berth at the Port of Savannah, McCarthy said. 

The port authority released an operations update last week showing the average dwell time for a container moving by rail after vessel unloading is two days, and that the average resting time within the terminal for import and export containers is about eight days, down from 11 and 10 days, respectively. The backlog of empty containers remains a problem, with boxes lingering an average of 17.8 days.

The improved performance is helping personnel work vessels faster and reduce Savannah’s cargo backlog. The number of ships at anchor in the Atlantic Ocean declined to 15 as of Monday morning from 22 two weeks ago, Morris said. There were 24 container vessels at anchor in mid-October. Total containers on the terminal also declined 13% and are down 16% from the peak of 85,000, according to the update.

McCarthy said there are about 225,000 TEUs currently on the water, a 10% to 12% reduction from early November that indicates “we are over the hump of the peak season.”

Last week, ocean carrier CMA CGM said its Liberty Bridge service from northern Europe to the U.S. East Coast would temporarily skip Savannah due to the congestion. According to the revised schedule, seven stops between late December and early February will be omitted. Shippers can send Savannah cargo to the Port of Charleston, South Carolina, until then, it said.

The GPA also noted that providers have increased the supply of chassis, the wheeled frames on which containers rest when pulled by truck, and are increasingly able to repair more chassis to help meet demand for cargo deliveries.

Mason Rail Terminal expansion. (Source: Georgia Ports Authority)

The Port of Savannah increased its near-dock rail capacity by 30% with the commissioning two weeks ago of a second set of nine tracks at the Mason Mega Rail Terminal. The port moved 550,000 containers by rail last year and now has more than 2 million TEUs of capacity with an eye toward future growth. The ability to discharge cargo from a vessel and ship it out by train in less than two days is best in class for the U.S., McCarthy noted.

A huge new container yard will come online in phases starting in December and culminate with about 820,000 TEUs of additional capacity by March. The project includes rubber-tired gantry cranes for sorting, stacking and transferring containers.

Construction of another berth is underway and scheduled to be complete in 2023.

Meanwhile, the federal dredging project to deepen the Savannah River to 47 feet (54 feet at high tide) is expected to be completed in the first quarter of 2022. It has already allowed vessels with deeper drafts to enter the port, McCarthy said. The deepening translates to about 200 extra loaded containers per foot and a total of 1,000 per vessel when the project is finished.

Tyler Durden
Tue, 11/30/2021 – 19:45

Author: Tyler Durden

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