Hedge funds are betting on secular growth while shying away from big tech and oil according to a new report from Jeffries.
While most regular investors don’t have millions of dollars to invest in hedge funds, they can still learn from their playbook. Especially as the economy seems to be veering into recessionary territory, taking a closer look at where hedge funds are seeing opportunities (and also what stocks and sectors they’re betting on) can provide some interesting insights for retail investors.
On Thursday, Jefferies Equity Research released a report that details some of the recent moves hedge funds have made over the past few months based on data encompassing trillions in assets. The big find? Growth is back, but not among traditionally popular tech stocks. After turning to cyclicals in June, the funds reverse their trajectory of last month and return to an overweight in secular growth and an underweight in cyclicals.
Secular growth – which are stocks of innovative companies that tend to post consistent gains – moved from a net underweight of 5.9% to an overweight of 9.3%, which returned to levels seen by analysts last January. Overall, the funds increased their exposure to health care while reducing their exposure to industrials, financials, communications services, materials and information technology. Since secular growth stocks generally grow despite economic conditions, they are a good choice during a recession. “The sector weightings have changed quite dramatically in my opinion,” says Steven DeSanctis, equity strategist. He explained that many funds are turning to what has worked historically during economic downturns. “[Investors] I want to own secular growth stocks during an economic downturn, because that’s what worked in 2020…I think people have gone back to the stocks they know and owned in the past.
But big tech didn’t get much love in the last quarter. Hedge funds have trimmed weight to major tech names, which Jefferies calls the “Sweet 16” in their report, after the past four months of adding weight to those stocks. Hedge funds reduced their weight in the four major stocks: Google, Meta, Amazon and Microsoft, by more than 1%. The Sweet 16’s underweight to the S&P 500 is now at 11.4% from 4.5% a month ago, the lowest weighting since October 2020.
After taking a net short position in healthcare in April, the sector is now attracting the attention of hedge funds. Healthcare is now overweight at 16.1% versus the S&P 500 index at 14.4%. A month ago, Health was net short by 5.3%. More than 30% of the names that went from short to long came from the health care group. DeSanctis explained that the bullish outlook on health care was driven by positive data and the notion that stocks are positioned to rise after poor performance recently. “I think you are finally reaching peak pain. So the shorts fell off after they just decided enough was enough,” he said. “We’ve seen some positive data, including deals and mergers, which has also helped.”
Energy is now the largest underweight – by 6.4% – and the only group net short by hedge funds. They are net overdrawn by 1.6%. “They’ve traditionally been short on power, eventually they moved to a long net, and now they’re back to short,” DeSanctis said. “Oil and energy in times of economic recession tend not to hold up.”
Jefferies saw only 3 changes to its “Crowded” portfolio, which is made up of stocks popular among the Long Only and Hedge Fund groups. The names added were Thermo Fisher Scientific, with a net long weight of 1.4, Linde plc, with a net long weight of 0.8, and The Coca-Cola Company, also with a net long weight of 0.8.
A caveat for investors: of the 6 portfolios tracked by Jeffries, only 2 were ahead of the S&P 500 in July. The report acknowledges that fund performance has been disappointing overall given current market conditions.
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