The Factory Daily Letter

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Q1 Hedge Fund reports

What do the filings tell us?

2022 has been a painful year for investors so far, with most asset classes in negative territory.  Hedge funds have been no exception, and the HFRX Global Hedge Fund index (representative of the overall composition of the hedge fund universe) is down 4% YTD.

However there has been quite some divergence between the different funds in terms of performance: as illustrated below, commodity hedge funds, CTAs and macro hedge funds so far appear to have emerged unscathed thanks to strong performances in commodity, fundamental discretionary and trend-following strategies (such funds seeing their best first quarters performance since 1993 according to data released by Hedge Fund Research).

However there are many single asset class funds or directional strategies that have proven unable to navigate or take advantage of the choppiness that we have seen in risky assets this year and a number of strategies have suffered big losses:

Source: FactSet; Pictet Trading Strategy; as of 18/5/2022.

Today we focus exclusively on the change in equity allocation and see what we can extract from the latest 13F reports in terms of the big fund managers' biggest bets.

What was hot and what was not for fund managers in Q1 2022?

The Q1 2021 13F-reports filed by the big institutional investment managers regarding equity holdings and made public by the Securities and Exchange Commission (SEC) are backward-looking, and do not disclose short positions. Yet we can still usually glean some insights from this record of hedge-fund positioning over the quarter, and at the very least get a view on which sectors and stocks have fallen in and out of favour among the professional investor community.

The main take-away from Q1? Hedge fund managers have significantly reduced their exposure to passive investments, reducing ETF investments in favour of taking a more active approach (i.e. seeking alpha instead of beta). Moreover, and while large-cap tech names continue to feature prominently in reported portfolio holdings, many tech and communication services stocks – they being highly sensitive to rate changes - have nonetheless recently been sold down.

2022 Q1 Hedge fund sector allocation

The chart below shows the change in sector allocation across the 1,134 hedge funds ($2.2 trillion) filing13F reports for Q1 2022 (the filing threshold being those with discretion over USD100 million in section 13F securities). 

The biggest movers to the upside on a sector allocation basis compared to Q4 2021 have been energy (to which exposure has risen 1.6%), materials (+0.7%) and industrials/staples (+0.4%). Allocation to technology and consumer discretionary stocks has fallen sharply (each -1.2%) while long exposure to communication services (-0.9%) has also been reduced:

Source: FactSet; Pictet Trading Strategy; as of 18/5/2022.

In the table below we illustrate the “active weight” of each sector, showing how far over/under weight hedge fund managers are relative to S&P500 index weighting.

While financials had a negative active weight in Q4 2021, it was positive for Q1 2022: managers increasing exposure to the sector while its weighting in the index fell (thereby mechanically boosting the active weight). Managers continued to be overweight materials, discretionary names and communication services on this basis in Q1 (even though allocation to these sectors fell over the quarter as illustrated above). Real estate and industrials had roughly neutral active weights, along with energy (despite the significant rise in allocation). They continue to be underweight the most defensive sectors (the rise in allocation to staples and utilities), and remain very underweight technology on this basis (-4.8pp active weight):

Source: FactSet; Pictet Trading Strategy; as of 18/5/2022.

In our previous (Q4 2021) 13F update (see it again here), we highlighted the fact that hedge fund long portfolio “active weight” had been falling since 2008 – and moreover that this trend had been accelerating since the end of 2019.

The line chart below illustrates the extent to which managers have been deviating from the benchmark (in this case “active weight” being the absolute value of the difference between HF sector allocation and S&P 500 index weighting). Interestingly, over the first quarter of 2022, managers seemed to have become more active again, “active weight” rising from 11.4% in Q4 2021 to 16.4%. While this level of active exposure is still quite low on a historical basis, it could reflect managers betting more aggressively on sector moves, whether to the upside or the downside:

Source: FactSet; Pictet Trading Strategy; as of 18/5/2022.

Hedge fund market exposure remained relatively unchanged in Q1 compared to Q4 2021

The chart below illustrates how hedge fund market exposure started to fall at the end of Q3 2021 and continued over the last quarter of 2021. However, it appears to have remained relatively unchanged over Q1 2022: at around 0.36:

Source: FactSet; Pictet Trading Strategy; as of 18/5/2022.

So what’s hot and what’s not?

1. Hedge fund favourites

While still negatively weighted as discussed above, tech stocks are still well-represented across the 25 largest holdings (ranked by market value in the screening below), with Microsoft (MSFT), Amazon (AMZN), Alphabet (GOOG & GOOGL), Visa (V) and Apple (AAPL) the top five.

That said, managers have trimmed their tech exposure. For instance, the number of Alphabet Class C held by hedge funds fell 15%; Apple 14%. Visa is the exception across the top five with managers increasing their exposure to the stock very slightly (+4%). Meta Platforms (Facebook’s parent company) was also trimmed (-12% in position change, at the same time suffering a sharp decline in its market value over the last quarter -42%). On the other hand, Taiwan Semiconductor ADR stock (TSM US) and S&P Global (SPGI US) have been bought (49% and 46%, respectively).

Managers also lost interest in the only ETF in this list: the SPDR S&P 500 ETF Trust (SPY US) (- 49%) reflecting the reduction a directional bets.

Source: FactSet; Markit, Copyright © 2022 S&P Global Market Intelligence; Pictet Trading Strategy; as of 18/5/2022. *Criteria are explained in the endnotes. The target price presented in the chart is based upon chart analysis. This is not the product of a

2. Biggest movers

A look at the biggest movers among the hedge fund portfolios also sheds light on the popular trends in the industry. Energy, health care and financials are the sectors the most heavily represented across those names that enjoyed the largest increases in positions, with First Horizon (+362.9%), Citrix Systems (+161.4%) and PNC Financial Services (+156.4%) recording the largest positioning changes over Q1 2022.

Worth noting is that there are no passive investment vehicles in this list (while three ETFs were in the top 5 in Q4 2021), again reflecting how managers are once again taking a more tactical approach to investment calls, favoring stock picking.

Source: FactSet; Markit, Copyright © 2022 S&P Global Market Intelligence; Pictet Trading Strategy; as of 18/5/2022. *Criteria are explained in the endnotes. The target price presented in the chart is based upon chart analysis. This is not the product of a

3. Holding decreases – what fell out of favour?

As mentioned above, managers appear to have shunned their directional bets (i.e. ETFs) in favour of a more active, tactical investment approach in Q1. This is illustrated below: for instance the iShares Core S&P 500 ETFs (IVV US) and the SPDR S&P 500 ETF Trust (SPY US) that track the performance of the S&P500 are at the top of the list of those names in which hedge fund positioning has decreased the most. Managers have sold off 72% of their positions in IVV US, and 49% of those in SPY US.

Looking at the stocks in the list below, managers have significantly reduced their exposure to the tech, communication services and discretionary sectors with Nvidia (NVDA US, -46%), Charter Communications (CHTR US, -43%) and Confluent INC (CFLT US, -38%) completing the top 5. Big tech names such as Apple (AAPL US, -14%), Meta (FB US, -12%), Alphabet (-7%), Microsoft (MSFT US) and Amazon (-3%) are among those names reduced. Retailers such as JD.com (JD US, -24%) and Bath & Body Works (BBWI SU, -7%) as well as food delivery and driving stocks such as Doordash (DASH US, -22%) and Uber (UBER US) also suffered from HF sell-offs.

Source: FactSet; Markit, Copyright © 2022 S&P Global Market Intelligence; Pictet Trading Strategy; as of 18/5/2022. *Criteria are explained in the endnotes. The target price presented in the chart is based upon chart analysis. This is not the product of a

4. So what’s new?

Below we present a screening of the most popular instruments in terms of the number of hedge funds that have brought them on to their books (having not held them prior).

Three funds opened new long positions in Taiwan semiconductor for $1.2+bn; four funds took new positions in Activision Blizzard (to the combined tune of almost $1.25bn as the company has being sold to Microsoft (MSFT) at $95 per share) and three added positions in the SPDR S&P500 ETF Trust:

Source: FactSet; Markit, Copyright © 2022 S&P Global Market Intelligence; Pictet Trading Strategy; as of 18/5/2022. *Criteria are explained in the endnotes. The target price presented in the chart is based upon chart analysis. This is not the product of a

5. What has been completely sold off?

Finally, we present below a screening of the most “unpopular” stocks in terms of the number of hedge funds that sold them completely off their books.

Again Meta platforms continues to fall out of fashion: after six managers closed their long positions in the stock in Q4 2021 ($3+ billion), another nine closed their positions in Q1 (for another $3.1 billion). Other long positions managers have decided to close completely include Netflix (one of the most iconic stocks of the lockdown and one that since the economy has reopened has seen its share price collapse back below its March 2020 Covid-19 bear market lows):

Source: FactSet; Markit, Copyright © 2022 S&P Global Market Intelligence; Pictet Trading Strategy; as of 18/5/2022. *Criteria are explained in the endnotes. The target price presented in the chart is based upon chart analysis. This is not the product of a

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