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Hedge Fund and Long-Only Bets Point to Trouble in the Consumer Sector

The coronavirus could worsen deteriorated confidence in consumer companies, according to Bank of America research.

Active fund managers are souring on the consumer sector, with sentiment being the worst since the financial crisis, according to research from Bank of America Corp.

Long-only positioning in discretionary and staples has slid to “the lowest level of confidence in the sectors in our data history since 2008,” Bank of America’s quantitative and equity strategists said in a research report Friday. Long-only managers have reduced their bets for four straight months in discretionary sectors and five consecutive months in staples, they said, while hedge funds similarly cut their exposure over the past two months.

As for short bets, the report shows that consumer discretionary companies are the most heavily bet against on the Standard & Poor 500 index, based on percentage of outstanding shares. Macy’s, Under Armour, Hanesbrands, and Nordstrom are among the top five companies with the highest portion of short interest, ranging from 17.5 percent to 28.8 percent of their floated shares in December, according to Bank of America’s research.

“Sentiment could get worse before it gets better, amid uncertainties around the coronavirus and its impact on spending,” the strategists said of confidence in the consumer sector. “With the market at record high, positioning is more important than ever.”

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The S&P 500 index is trading around an all-time high, making it increasingly hard to produce alpha, the Bank of America strategists said. “This earnings season, even the companies that beat on both top and bottom lines provided almost no alpha, suggesting a lot of good news has already been priced in.”

Hedge fund crowding is partly to blame for the difficulty in producing market-beating gains.

Stocks that were neglected by hedge funds, and beat earnings expectations, produced 10 times more alpha compared to crowded stocks that exceeded expectations, according to the report. “Downside risk was also protected, as neglected stocks that missed on both top and bottom lines still outperformed the S&P 500 the next day,” the strategists said. 

In December, hedge funds were collectively most exposed to biopharmaceutical company Incyte Corp., metals manufacturer Arconic, and United Airlines Holdings, according to the report. The least crowded stocks were department stores Macy’s and Nordstrom and clothing company Hanesbrands.

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