Goldman Analysis Shows Hedge Funds Long and Not So Strong

Dear spouses, children and parents of hedge-fund managers: forgive your loved one if the gifts arent so generous this holiday season.

Managers are still pocketing their usual fee of 2 percent of investors assets for simply showing up, but the 20 percent of profits are proving harder to come by. As Goldman Sachs Group Inc. pointed out in a Nov. 20 report, the average fund has lost 1 percent so far this year even as the Standard & Poors 500 Index returned more than 13 percent including dividends.

Look, no one is saying its going to be only socks and long johns for Christmas and Hanukkah this year. Just maybe that you shouldnt count on that $35,000 cocktail shaking contraption or the $300,000 toy race-car set from Neiman Marcus.

Hedge funds long exposure to equities rose to a record high of 54 percent at the start of the fourth quarter, the report shows. Yet the stocks they focused on are proving problematic: They continued to favor companies that rely on discretionary consumer spending with a net 21 percent weighting, almost 8 percentage points more than their allotment in the Russell 3000 Index. (RAY) The group is up 5 percent in 2014, the second-worst performing industry among nine in the index.

Energy companies, the worst performing group so far this year with a 1.7 percent drop, are the second biggest hedge-fund weighting at 14 percent, more than 5 percentage points above their Russell 3000 weighting. Of the industries they are underweight, technology, utilities and consumer staples are all beating the market this year.

Their big love of small companies is also taking a toll: The report said the typical fund has 35 percent of its assets in stocks from the Russell 2000 Index (RTY), which is only up 1.3 percent this year.

Still, its not all bad news. The shares that funds loaded up on last quarter are up a median 16 percent so far in the fourth quarter, according to the additions to Goldmans Very Important Position list of popular long positions. They include Yahoo! Inc., United Continental Holdings Inc., Alibaba Group Holding Ltd., Mylan Inc. and Visa Inc. Among those dropped from the list were Amazon.com Inc., CBS Corp. and Walgreen Co.

The Goldman Sachs report was based on 782 hedge funds with $2 trillion of gross equity positions. Look, 2 percent of $2 trillion is still $40 billion. So if you do get nothing but socks this year, maybe theyll at least be an $85 three-pack of Robert Grahams argyles. According to data compiled by Bloomberg, thats a bargain at less than $14.17 per sock.

To contact the reporter on this story: Michael P. Regan in New York at mregan12@bloomberg.net

To contact the editors responsible for this story: Jeff Sutherland at jsutherlan13@bloomberg.net

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Goldman Analysis Shows Hedge Funds Long and Not So Strong