Goldman's Formula For Beating A Stampeding Bull Market

Goldman Sachs' basket of 50 of the top stocks held by hedge funds has been racing ahead of the surging market. The group was up roughly 14% this year versus the average equity fund’s 6% increase and the S&P 500’s 11% return through last Friday. Surprisingly, the basket is comprised of many mega tech holdings that were thought to be out of favor with investors this year, including Amazon.com Inc. (AMZN), Microsoft Corp. (MSFT), Facebook Inc. (FB), Alphabet Inc. (GOOGL) and Alibaba Group Holdings (BABA), which make up the top five. The Hedge Fund VIP, deriving its name from "Very Important Position," has outperformed the S&P 500 in 62% of quarters since 2001, according to Goldman. The firm selected its 50 stocks from equities that appear most frequently in the top 10 holdings of 880 fundamentally-driven hedge funds, according to a detailed story in CNBC.

"Recent hedge fund returns have benefited from the outperformance of the most popular long positions as well as the decision to increase net length ahead of the equity market bottom in December 2018," wrote Goldman strategist Ben Snider.

Goldman's Hedge Fund VIP

  • +14% this year vs. 11% for S&P 500
  • Top 5 holdings: Amazon, Microsoft, Facebook, Alphabet, Alibaba
  • New holdings: GoDaddy, Dollar Tree, Electronic Arts, Micron Technology, HCA Healthcare 

Source: CNBC, BI *Stock gains as of 2/22

Hedge Fund VIP Basket Adds Small Tech, Healthcare

Goldman’s basket can attribute this year’s wins in part to tech stocks' rebound after a plunge in December. All five of the funds biggest tech holdings are up between 7% and 33% in 2019. While Microsoft, Alibaba, and Facebook beat the market, Amazon and Google have lagged.

As they loaded up on the mega techs, hedge funds also have bought smaller tech companies, health care leaders and retailers. The Hedge Fund VIP recently added health insurer Cigna Corp. (CI), which it says is the most popular new stock, per Business Insider. Other stocks include GoDaddy Inc. (GDDY), Dollar Tree Inc. (DLTR), Electronic Arts Inc. (EA), Micron Technology Inc. (MU) and HCA Healthcare Inc. (HCA). 

Looking Ahead

Despite Hedge Fund VIP's stellar performance this year, some market watchers warn that the big gains for the mega techs are over, which suggests that returns for the VIP fund also could be limited. S&P Global’s Erin Gibbs sees equities rotating out of mega-cap growth stocks into the broader market, as well as value, per CNBC. She argues that Alphabet and Amazon are pricey and could underperform for the rest of the year.

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