Six years ago, back in 2013, we presented what we then viewed (and still view) as the best trading strategy of the New Abnormal period, when we said that buying the most shorted names while shorting the names that have the highest hedge fund concentration and institutional ownership is the surest way to generate alpha, to wit:
… in a world in which nothing has changed from a year ago, and where fundamentals still don’t matter, what is one to do to generate an outside market return? Simple: more of the same and punish those who still believe in an efficient, capital-allocating marketplace and keep bidding up the most shorted names.
Following this initial observation, we would periodically urge readers to keep doing this simple trade year after year, which repeatedly proved to be the best source of alpha in a market that has become infatuated with beta, as none other than Bank of America confirmed in late 2019 when it showed that going long the most shorted names and shorting the most popular ones has continued to be not only the most consistently profitable, alpha-generating strategy, but that in 2019, the top 10 crowded stocks underperformed the 10 most neglected stocks by 23%, the most on record!
The topic of high investor concentration also dominated the latest hedge fund monitor report from Goldman Sachs which once every quarter summarizes the bank’s take on hedge fund positioning based on 13F reports.
Not surprisingly, what it found is that as the coronavirus pandemic sparked a 34% plunge in US equities – before the Fed stepped in – hedge funds, scrambling to protect against further losses, concentrated their portfolios even further into their favorite growth stocks. This happened even as HF tilts to growth stocks and defensive industries were large coming into 2020, and at the start of 2Q rivaled the most extreme levels on record. In fact, according to Goldman, the two stocks with the largest increase in hedge fund popularity in 1Q – AMZN and MSFT – already ranked among the top stocks in our VIP list of the most popular hedge fund long positions. This represents the seventh consecutive quarter with the same top 5 VIPs. AMZN has topped the list in 5 of the last 6 quarters.