Welcome to RBC’s Markets in Motion podcast, recorded May 25th, 2021. I’m Lori Calvasina, Head of US Equity Strategy at RBC Capital Markets. Please listen to the end of this podcast for important disclaimers.
This week in the podcast we run through what we learned from our review of the 1Q21 13fs of major US based hedge funds which were released last week. The big thing you need to know: the most popular Large Cap stocks in hedge funds in terms of the Dollar value owned, which we call the Hot Dogs, have continued to underperform in 2021 in a significant way.
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Now, the details.
Point number one, the Hot Dogs have continued to underperform in 2021, continuing a trend that began last year.
- The underperformance that we’ve seen in the Hot Dogs has been similar to what we saw in 2016. Just like this year, 2016 was another period that saw stock market leadership shift away from safer secular growers and back towards riskier Value and cyclical recovery plays.
- This time around, the Hot Dogs underperformance started last August, when the Hot Dogs hit an all-time high relative to the S&P 500, right as the reflation trade took off. Underperformance has been particularly sharp over the last few months.
- We suspect the pressure on these names will not let up as long as Value leadership remains intact. That’s generally what we have seen over time – that when Growth is out of favor, the most crowded hedge fund stocks underperform.
- The TIMT space (Tech, Internet, Media, Telecom) continues to dominate the Hot Dogs list, accounting for 15 of 20 names. However, TIMT representation was down slightly compared to 4Q20.
- As we discussed in the podcast last week, we think the pain in TIMT likely isn’t done, as the sector doesn’t look cheap yet, crowded positioning hasn’t fully unwound, and inflation worries, which tend to spark rotation out of TIMT, aren’t likely to abate anytime soon.
Point number two, popular hedge fund names in Communication Services, Tech, and Consumer Discretionary have lagged sharply in 2021.
- Not surprisingly, when we dig down a little deeper into performance and hedge fund ownership trends by sector, we find that the pain in popular hedge fund stocks has been primarily driven by underperformance of the most heavily owned hedge fund names within Communications Services, Technology, and Consumer Discretionary.
- These sectors are pillars of the Growth trade, which have come under severe pressure as market leadership has shifted back to Value oriented cyclicals and reflation/inflation stories.
- For each of these three sectors, 2021’s weakness represents a reversal of trends from 2020 when the most popular hedge fund names within them outperformed.
Point number three, Energy has bucked the trend, as the most popular Energy stocks in hedge funds have actually been outperforming in early 2021.
- This is the only sector where high hedge fund ownership has worked well as a factor in 2021.
- It’s continues a trend seen in 2020.
- We find this fascinating, given that hedge fund positioning in Energy remained neutral as 1Q21 came to a close. The hedge fund weighting in the sector was essentially in line with the Russell 3000 and the relative weighting was also in line with the historical average.
- As long as the Energy sector continues to outperform, it’s reasonable to assume that this list can be a continued source of leadership given that hedge funds have been maintaining an in line weighting.
Wrapping up with one last thought on Financials. Given the rotation into Value and Financials in the 1st quarter in the US equity market generally, we were surprised that we didn’t find more evidence of hedge funds pivoting to that space in 1Q.
- There were a few stocks from Financials on our Rockets screen, which highlights the stocks with the biggest increases in hedge fund ownership in 1Q. But the number was similar to what we saw for several other major sectors.
- More importantly, Financials and Banks both remained big underweights for hedge funds at the end of 1Q, and we actually saw those underweights deepen a little during the quarter. If the Value trade and Financials continue to outperform, as we suspect will be the case, hedge funds simply aren’t positioned well.
That’s all for now. Thanks for listening. Please reach out to your RBC representative with any questions.