Hedge funds have reduced their exposure to technology stocks and consumer staples in the first quarter of 2023, according to a new report by Goldman Sachs. The report, which analyzed the holdings of 835 hedge funds with $2.6 trillion of gross equity positions, found that hedge funds sold $19 billion of tech stocks and $7 billion of consumer staples stocks in the quarter, as they anticipated higher inflation and interest rates.
Tech stocks lose favor as growth prospects dim
Technology stocks, which have been the main drivers of the stock market rally in the past decade, have lost some of their appeal as investors worry about their high valuations and slowing growth prospects. The report said that tech stocks accounted for 27% of hedge fund net exposure at the end of the first quarter, down from 29% at the end of 2022. Tech stocks also saw the largest decline in popularity among hedge funds, as 19% of hedge funds reduced their tech exposure in the quarter, compared to 12% that increased it.
The report noted that some of the tech stocks that hedge funds sold in the quarter were the ones that had performed well in 2022, such as Apple, Microsoft, Amazon, and Facebook. These stocks, which are part of the FAAMG group, saw their combined market capitalization drop by $600 billion in the quarter. The report said that hedge funds reduced their FAAMG holdings by $8 billion in the quarter, while increasing their exposure to other tech stocks, such as Alphabet, Netflix, and Tesla, by $3 billion.
Consumer staples stocks face headwinds from rising costs and competition
Consumer staples stocks, which are typically seen as defensive and stable investments, have also faced headwinds from rising costs and competition. The report said that consumer staples stocks accounted for 7% of hedge fund net exposure at the end of the first quarter, down from 8% at the end of 2022. Consumer staples stocks also saw the second-largest decline in popularity among hedge funds, as 18% of hedge funds reduced their consumer staples exposure in the quarter, compared to 10% that increased it.
The report noted that some of the consumer staples stocks that hedge funds sold in the quarter were the ones that had faced challenges from rising commodity prices, supply chain disruptions, and changing consumer preferences, such as Procter & Gamble, Coca-Cola, PepsiCo, and Costco. These stocks, which are part of the S&P 500 Consumer Staples Index, saw their combined market capitalization drop by $100 billion in the quarter. The report said that hedge funds reduced their holdings of these stocks by $4 billion in the quarter, while increasing their exposure to other consumer staples stocks, such as Walmart, Target, and Kroger, by $1 billion.
Hedge funds increase exposure to cyclical and value stocks
While hedge funds reduced their exposure to tech stocks and consumer staples stocks, they increased their exposure to cyclical and value stocks, which are expected to benefit from the economic recovery and the reopening of the economy. The report said that hedge funds bought $25 billion of cyclical stocks and $16 billion of value stocks in the quarter, as they rotated their portfolios to capture the changing market dynamics.
The report noted that some of the cyclical and value stocks that hedge funds bought in the quarter were the ones that had been hit hard by the pandemic, such as energy, financials, industrials, and materials. These stocks, which are part of the S&P 500 Value Index, saw their combined market capitalization increase by $800 billion in the quarter. The report said that hedge funds increased their holdings of these stocks by $12 billion in the quarter, while reducing their exposure to other cyclical and value stocks, such as healthcare, utilities, and real estate, by $4 billion.
Hedge funds remain optimistic about the stock market outlook
Despite the rotation in their portfolios, hedge funds remain optimistic about the overall stock market outlook, according to the report. The report said that hedge funds increased their net leverage, which measures the ratio of their long positions to their short positions, to 67% at the end of the first quarter, up from 66% at the end of 2022. The report also said that hedge funds increased their net exposure, which measures the difference between their long positions and their short positions, to 51% at the end of the first quarter, up from 50% at the end of 2022.
The report attributed the increase in hedge fund net leverage and net exposure to the strong performance of the stock market in the first quarter, as well as the positive outlook for the economic recovery and the vaccine rollout. The report said that the S&P 500 Index, which tracks the performance of the 500 largest US companies, gained 6% in the first quarter, reaching a new record high of 4,232 points on April 16, 2023. The report also said that the US economy grew by 6.4% in the first quarter, the fastest pace since 2003, and that the US vaccination rate reached 70% of the adult population by the end of April, 2023.
The report concluded that hedge funds are well-positioned to take advantage of the opportunities and challenges that the stock market may present in the coming quarters, as they have diversified their portfolios and adapted to the changing environment.
