Salesmen work on the floor at the New York Stock Exchange.
Brendan McDermid | Reuters
Sometimes following the crowd can be a profitable master plan, particularly if that crowd is composed of hedge fund managers who have been beating the market.
While instating often seems like a contrarian game where going against the flow feels like the better bet, the authenticity is that investors who bought the most-favored stocks have seen the best returns, according to a Goldman Sachs review of some 855 hedge funds whose assets total $2.1 trillion of the industry’s $3.2 trillion out-and-out.
“Despite the strong track record of popular hedge fund stocks, investors often view high ownership as a No trait when evaluating stock prospects. Clients often ask us to include hedge fund ownership data in progenitor screens, expressing a preference for buying ‘under-owned’ stocks,” Goldman strategist Ben Snider said in a report for clients. “In to be sure, during the past decade hedge fund popularity has been a more useful criterion for selecting stocks than valuations.”
Inclusive, the funds in the firm’s coverage universe have returned 8% year to date.
But the basket of stocks with the most everyday long positions and the highest concentrations have performed far better, returning 18% to easily outdistance the S&P 500, which had made 15% through the first quarter, the period during which Goldman conducted its review.
That means entourages like Amazon, Facebook and Microsoft, each of which posted gains exceeding 25% in the first quarter.
That hasn’t been the prove just this year.
Since 2001, stocks appearing in the top 10 portfolio positions have beaten the S&P 61% of the at intervals, with an average excess return of 0.55 percentage points. Funds that hold the most shares of those hoards have beaten the market 63% of the time, with an average excess return of 1.96 percentage points.
“The signals from hedge stock popularity and valuation have been particularly useful in combination, especially for investors with slightly longer investment purviews. During the past decade, popular stocks have generally outperformed unpopular stocks across both 3- and 12-month investment field of visions,” Snider wrote.
The results come at a time when hedge funds overall have been criticized for their cheerful fees and less-than-market returns.
Looking at the entire industry and its nearly 10,000 funds, the gain through April was 7.2%, as planned by the HFRI Fund Weighted Composite Index, compared with the S&P 500’s total return of 18.2% through the interval.
That makes stock selection all the more important.
Other companies in the VIP basket of the most-held stocks include Alphabet, Alibaba, Netflix, Celgene and Visa.