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Hedge Funds Reduced Their Exposure to the Market in Q2
Hedge funds’ modest exposure to the market helps to explain why most funds are lagging the broader markets this year.
Hedge funds reduced their net long exposure at the end of June compared to the prior quarter.
The net exposure fell to 43 percent from 49 percent, according to a recent Goldman Sachs analysis based on a universe of 699 hedge funds with $1.2 trillion of gross assets at the start of the third quarter.
“Hedge funds reduced risk as the market pulled back in 2Q (second quarter), and their long positions suffered,” Goldman states in the report.
The modest exposure to the market helps to explain why most hedge funds are lagging the broader markets this year, and especially this summer during the recent rally.
In fact, Goldman figures just 11 percent of funds have outperformed the S&P 500 this year (through August 3). What’s more, 20 percent have lost money.
In 2011, just 26 percent of hedge funds beat the S&P 500, according to Goldman.
This pervasive disappointing performance has had a fairly large impact on the industry, as redemptions have been outpacing investments for most of the past few months and the number of new fund launches has been slowing of late.
Altogether, the group of funds Goldman tracks was long $774 billion and short $438 billion at the end of the second quarter.
During that period, hedge funds raised their net exposure to the Consumer Discretionary and Consumer Staples sectors. At the same time, they reduced their exposure to Financials and Health Care.
They were most overweight Consumer Discretionary relative to the Russell 3000, with a 23 percent exposure compared to the index’s 12 percent weighting.
Altogether they were overweight four of 10 broad industry categories — the other three being Materials, Energy and Information Technology.
Looked at a different way, hedge funds were net long two industries — Materials (62 percent) and Energy (52 percent).
On the other hand, hedge funds had the lowest exposure to Utilities, where they were net long just 18 percent. They were net long around 31 percent to 33 percent Consumer Staples, Health Care and Financials.