Anything For You All: Hedge funds are playing with fire as they all cram into the same stocks

Senin, 04 Maret 2019

Hedge funds are playing with fire as they all cram into the same stocks

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Hedge funds are playing with fire as they all cram into the same stocks — and their behavior could make the next market crash even worse

Goldman Sachs conducts a regular survey of large investment managers, and the latest version featured findings from 880 hedge funds overseeing a combined $2.1 trillion in stock positions.
The firm discovered that the "density" of hedge fund holdings was its highest since at least 2002, meaning the funds were holding a big percentage of their portfolios in their top 10 stock picks.
This is creating a dangerous situation for investors in the event of a severe market downturn — one that could worsen any major sell-off.

It's one thing for investors to have conviction in their decisions. But it's quite another to press their luck to the point where any sort of downturn can have a catastrophic impact on their portfolio.

Hedge funds are flirting with that fine line, according to data compiled by Goldman Sachs.

The firm analyzed the holdings of 880 hedge funds with $2.1 trillion of gross equity positions and found that a measure known as "density" was historically stretched. More specifically, Goldman found that the average hedge fund held 70% of its long portfolio in its top 10 positions — the highest portion since at least 2002.

The metric matters because a lot of those top positions are the same across hedge funds, leaving investors vulnerable to sharp sell-offs.

That's because, at the first sign of stress, investors jammed into the same holdings will simultaneously stampede toward the exits. And that, in turn, can make a bad situation worse when it comes to a major market meltdown — especially for those who get out last.

Read more: BANK OF AMERICA: 3 binary events will determine the stock market's fate in 2019 — here are all the scenarios and what each one will mean for you

So it almost goes without saying that — in the ominous event of a full-fledged stock-market crash — the last place an investor wants to be is piled in to a crowded position. To the extent that hedge funds are still loaded up on the same popular names, the next downturn could be made worse.

With all of that established, it's worth noting that doubling down on proven winners can be a lucrative strategy when everything is going swimmingly in the market. After all, hedge funds wouldn't be cramming into those stocks with abandon if they weren't offering strong returns.

Still, it would seem to be a prudent strategy for investors insistent upon staying invested in crowded stocks to seek some downside hedges. At the very least, they could help offset the damage once the tables turn on those high-density trades. Read »