So much for hedge funds’ reputation for being quick-trading, opportunistic investors.
Judging by the most recent data, hedge funds proved once again that they are mostly buy-and-hold investors committed to their favorite stocks, according to Goldman Sachs’ quarterly review of hedge funds’ long stock holdings. Overall portfolio turnover was just 27 percent in the September quarter, extending a six-year trend to an all-time low, the investment bank found. What’s more, the turnover of hedge funds’ largest long positions was just 14 percent.
In addition, the average hedge fund has 68 percent of its long-equity assets invested in its ten largest positions. This compares with 31 percent for the average large-cap mutual fund and 20 percent for the average small-cap mutual fund.
Drilling down, the nine stocks with the highest number of hedge fund owners (regardless of the size of the positions in hedge funds’ portfolios) stayed the same for the past two quarters. Only the order of popularity changed.
For the first time in several quarters, Apple was the most popular hedge fund stock, with 158 hedge funds owning a position. This is up from 139 at the end of the second quarter. The stock is the largest holding of David Einhorn’s Greenlight Capital and the second-largest holding of multistrategy and quantitative firm D.E. Shaw & Co. New large shareholders in the third quarter include Tiger Cub Philippe Laffont’s Coatue Management and Daniel Loeb’s Third Point.
Facebook was the second-most-popular hedge fund stock as of September 30, with 155 hedge fund investors — down from 169 last quarter, when it was the most popular. Among the firms that liquidated their stakes in the social media pioneer in the third quarter were Dorsal Capital Management, Och-Ziff Capital Management Group, and Caxton Associates.
The other seven stocks that were among the most popular for past two quarters are Allergan, both share classes of Google parent Alphabet, Amazon.com, Bank of America, Microsoft Corp., and Visa. In fact, the most significant change to the quarterly list of top ten hedge fund stocks is Charter Communications, which ranked tenth, with 105 hedge fund investors. Last quarter it failed to crack the top 50 list, for which companies needed to have at least 68 hedge fund investors to qualify.
Alibaba Group Holding, which ranked No. 20 with 83 hedge fund investors, also did not make the cut last quarter. Nor did Dell Technologies, which ranks No. 13 this quarter, with 90 investors, in a tie with biotech company Biogen. However, the computer maker at least has a good excuse. It started trading in September after Dell merged with publicly traded EMC Corp.
On the other hand, airline giant Delta Air Lines lost favor with hedge funds, dropping to No. 19 (with 85 hedge fund investors) from No. 10 last quarter (with 103 hedge fund investors).
Goldman also tracks the companies with the highest percentage of their market capitalization owned by hedge funds. As it happens, this basket has a strong track record of performance: According to Goldman’s analysis, since 2001 the basket of stocks with the largest share of their market caps held by hedge funds has outperformed the S&P 500 during 68 percent of quarters, by an average of 251 basis points, or 2.51 percentage points.
Five stocks rank at the top of Goldman’s three different screens of hedge fund ownership. Essentially, these stocks are widely held and enjoy heavy hedge fund concentration. The five stocks are distiller Constellation Brands, managed health care giant Humana, Internet pioneer Yahoo, cable giant Charter, and airline United Continental Holdings.
Two of the top ten holders of Constellation are Tiger Cubs Lone Pine Capital and Viking Global Investors. The stock is also the largest U.S. long of Tiger Grandcub Valinor Management.
Larry Robbins’s Glenview Capital Management is the third-largest shareholder of Humana, which is also the hedge fund’s largest U.S. long. The stock is the second-largest long of Ricky Sandler’s Eminence Capital.
Yahoo, of course, has been a major activist target and the second-largest long of Jeffrey Smith’s activist hedge fund firm, Starboard Value. The stock is also the largest U.S. long of Canyon Partners, the fourth-largest shareholder, and is the second-largest U.S. long of Owl Creek Asset Management, the stock’s seventh-largest holder.
Charter is the largest U.S. long position of Lone Pine. One of its new shareholders is Crispin Odey’s Odey Asset Management Group.
AQR Capital Management is the eighth-largest shareholder of United Continental, which is also the ninth-largest U.S. long of Leon Cooperman’s Omega Advisors. Otherwise, the stock has a dearth of major hedge fund investors.
