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Hedge Funds are Getting Selective: Insights from Hedge Fund Positioning in Early 2025 Thumbnail

Hedge Funds are Getting Selective: Insights from Hedge Fund Positioning in Early 2025

Goldman Sachs' latest Hedge Fund Trend Monitor offers a deep dive into the positioning of 695 hedge funds, managing $3.1 trillion in gross equity positions. The report reveals key shifts in hedge fund strategies at the start of 1Q 2025, highlighting selectivity in sectors, thematic rotations, and increasing leverage.

Here are the critical takeaways from the research.

1. Performance and Market Exposure

  • Hedge funds delivered a +3% YTD return, driven by both alpha and beta.
  • The Hedge Fund VIP basket, representing the most popular long positions, returned +10% YTD, outperforming the S&P 500 (+4%).
  • Hedge fund net exposures are at their highest levels since early 2022, and gross exposures are near record highs.
  • Short interest for the median S&P 500 stock increased to 2.0% of market cap, the highest since 2020.

2. Hedge Fund Positioning and Rotations

  • Hedge funds have become increasingly selective in sector allocations.
  • A notable shift occurred away from Financials, despite their post-election rally of +12%.
  • Health Care and Communication Services saw increased allocations, benefiting from high dispersion opportunities.
  • Despite a net reduction in exposure to the Magnificent 7, Tesla (TSLA) emerged as a "Rising Star" with increasing hedge fund interest.

3. Thematic Rotations and AI Exposure

  • Hedge funds added to AI-exposed stocks categorized under "Phase 3" (enabled-revenues), with CRM and NOW being the most popular additions.
  • Stocks expected to benefit from deregulation, such as SF, TSLA, and WMB, saw increased allocations.
  • The software industry’s weight in hedge fund long portfolios reached 11%, the highest since 3Q 2023.

4. Leverage and Concentration Trends

  • Gross and net hedge fund leverage rank in the 100th and 73rd percentiles, respectively, over the past five years.
  • The typical hedge fund holds 71% of its long portfolio in its top 10 positions, with portfolio concentration and crowding at extreme levels.
  • Hedge fund portfolio turnover increased, with 24% of distinct equity positions and 12% of the largest holdings changing in 4Q 2024.

5. The Hedge Fund VIP List: Key Stock Holdings

  • The six most popular hedge fund long positions remain AMZN, META, MSFT, NVDA, GOOGL, and AAPL.
  • New additions to the VIP list include AER, AJG, BSX, CART, COF, CZR, DAL, EXE, HLT, PFE, RDDT, SGI, and WDAY.
  • The Hedge Fund VIP basket has historically outperformed the S&P 500 in 60% of quarters since 2001, with an average quarterly excess return of 52 basis points.

6. Short Interest and Defensive Positioning

  • Hedge fund short positions are concentrated in Consumer Staples, Utilities, and Health Care, where short interest is above 30-year averages.
  • Stocks with significant increases in short interest since Election Day include select Russell 3000 names with market caps above $5 billion.

7. Sector Preferences and ETF Usage

  • Health Care became the largest hedge fund net sector weight (17% of total net exposure), with Info Tech being the most significant underweight (-1,323 basis points).
  • ETF allocations in hedge fund long portfolios surged to 4.8%, the highest level since 2009.
  • Hedge funds primarily use ETFs as hedging tools, with $202 billion in ETF shorts representing 67% of gross hedge fund ETF exposure.

8. Rising and Falling Stars: Stocks Gaining or Losing Hedge Fund Popularity

  • "Rising Stars" with the largest increase in hedge fund ownership included AJG, HOOD, and SF.
  • "Falling Stars," or stocks with the largest decreases in hedge fund ownership, included QRVO, MU, and AMD.

Conclusion: A Selective Hedge Fund Landscape

Hedge funds continue to refine their positioning, adapting to macroeconomic shifts and policy developments. While leveraging both alpha and beta, funds are increasing their exposure to AI, deregulation beneficiaries, and high-dispersion sectors like Health Care and Communication Services.

However, elevated market exposure and concentrated positioning indicate a higher risk environment, making selectivity a crucial factor in hedge fund strategies for 2025.

Goldman Sachs' Hedge Fund Trend Monitor underscores that while hedge funds are maintaining high exposure, they are doing so with a focus on key themes and selective positioning. Investors looking to navigate these trends may benefit from tracking hedge fund rotations and thematic allocations.