On Thursday, Jefferies Equity Research released a report detailing some of hedge fund’s recent moves made in the past months based on data involving trillions of assets. The big discovery? Growth is back a long time — but not among traditionally popular tech stocks. After the funds veered into the cycles in June, the funds reversed their trend from last month and return toward overweight in chronic growth and underweight in journalism.
Secular growth — stocks of innovative companies that tend to post flat gains — went from a net decline of 5.9 percent to an overweight of 9.3 percent, which has returned to levels seen by analysts last January. Overall, the funds increased their exposure to healthcare while decreasing exposure to industries, finance, communications services, materials and information technology. Since secular growth stocks usually experience growth despite economic conditions, they are a good option during a recession. “The sector weights have changed quite a bit in my opinion,” says Stephen Desanctis, equity strategist. He explained that many funds are looking at what has historically worked during economic downturns. “[Investors] They want to own chronic growth stocks during the recession, because that’s what worked in 2020…I think people are back in the stocks they knew and owned in the past.”
But big tech didn’t get much love in the last quarter of the year. Hedge funds have reduced their weight to leading technology names, which Jefferies called “Sweet 16” in their report, after the past four months of overweighting these stocks. Hedge funds reduced their weight in the four largest stocks: Google, Meta, Amazon and Microsoft, by more than 1%. The Sweet 16’s weight against the S&P 500 is now down at 11.4% versus 4.5% one month ago, the lowest weight since October 2020.
After entering into a net sell-off in healthcare in April, the sector is now attracting the interest of hedge funds. Healthcare is now 16.1% overweight compared to the S&P 500 at 14.4%. A month ago, Net Healthcare was short 5.3%. More than 30% of the short to tall names came from the healthcare group. DeSanctis explained that the upbeat outlook on healthcare was driven by positive data and the idea that stocks are in a position to rally after the recent poor performance. “I think you have finally reached your maximum pain point. So, the shorts were put on after they had just decided that enough was enough,” he said. “We saw some positive data including deals and mergers, so that contributed as well.”
Energy is now the biggest underweight – at 6.4% – and the only group sold by hedge funds. They are net selling at 1.6%. “They’ve traditionally been short on energy, they’ve finally made it to a long net, and now they’re back with a net loss,” DeSanctis said. “Oil and energy in recession tend not to hold up.”
Jefferies has seen only 3 changes in its “busy” portfolio, which consists of stocks popular with both Long Only and Hedge Fund groups. The added names were Thermo Fisher Scientific, 1.4 net long, Linde plc, 0.8 net weight, and The Coca-Cola Company, also 0.8 net long.
One warning to investors: Of the six portfolios that Jefferies tracks, only two were ahead of the S&P 500 in July of this year. The report acknowledges that the Funds’ performance has generally been disappointing given the current market conditions.