Hedge funds aren’t getting overly optimistic, even as economic data looks promising. Defensive holdings by long-short funds are historically high relative to cyclicals. Here are 20 stocks that hedge funds are gravitating toward in this uncertain market. Although several economic signals have offered investors reasons for optimism right now, hedge funds can’t seem to shake their cautious convictions.
Besides a stubbornly low unemployment rate and resilient GDP growth, positive signs for the economy include still-rising consumer spending data and accelerating capital expenditure by businesses, according to Bank of America.
The banking giant abandoned its recession call in early August, and several of its Wall Street counterparts have recently done the same. Bank of America released a survey two weeks later that found only 20% of global fund managers expect a crash landing for the economy. Generally, respondents had gone from negative to neutral on risk assets.
The rate of fund managers who told Bank of America that a downturn is unlikely to happen in the next year was the highest since last June. Bank of America But actions speak louder than words, and those running hedge funds and long-only funds don’t seem to be putting their money where their mouth is. Bank of America analyzed their holdings and found that big-money investors appear to be preparing for more turbulence.
“Despite fading recession concerns, active equity exposure to cyclical vs. defensive sectors and high beta stocks remains well below average,” wrote Savita Subramanian, the head of BofA’s US Equity Strategy unit, in an August 25 note.
The proportion of cyclical stocks held relative to defensives has fallen for years. Bank of America Managers of hedge funds and long-only funds have shifted toward defensive stocks over the last few years, according to Bank of America. The firm also found that long-short funds actually have larger weightings in defensives relative to their economically sensitive peers.
Hedge funds are weighted more toward defensives, as shown by the below-1 cyclical-to-defensive ratio in this chart. Bank of America A defensive posture may seem misplaced with stocks soaring year-to-date, but the so-called smart money didn’t earn their reputation by accident. The latest polls of consumers and purchasing executives show surprisingly weak sentiment, Subramanian noted, which could foreshadow weaker spending ahead.
Other concerns, including fading labor market momentum and a chance of higher interest rates, have many market observers convinced that a contraction is still coming.
20 stocks hedge funds love nowWhile hedge funds are playing defense until further notice, that’s not to say they’re bearish. In fact, hedge funds are now 20% net long, which is close to a record, Subramanian pointed out.
To get a better look into how hedge funds are investing, Bank of America researchers used FactSet data to find S&P 500 stocks that received the highest net relative exposure from the group. Stocks that screened best were those that hedge funds have the largest relative net weight in, as measured by subtracting their short positions from their long positions.
While the list doesn’t show stocks that long-short fund managers are recommending outright, it does indicate which companies hedge fund managers like most relative to the broader market. There are many different sectors represented — not just the defensive ones.
Below are the 20 stocks that hedge funds are unusually bullish about along with the ticker, sector, and net relative weight in hedge funds for each.