Hedge funds are playing with fire as they all cram into the same stocks — and their behavior could make the next market crash even worse
Goldman Sachs conducts a regular survey of large investment managers, and the latest version featured findings from 880 hedge funds overseeing a gross total of $2.1 trillion in stock positions.
The firm discovered that the “density” of hedge fund holdings is the highest since at least 2002, meaning they’re holding a big percentage of their portfolios in their top 10 stock picks.
This is creating a dangerous situation for investors in the event of a severe market downturn — one that could worsen any major sell-off.
As an investor, it’s one thing to have conviction in your decisions. But it’s quite another to press your luck to the point where any sort of downturn can have a catastrophic impact on your portfolio.
Hedge funds are flirting with that fine line right now, according to data compiled by Goldman Sachs.
The firm analyzed the holdings of 880 hedge funds with $2.1 trillion of gross equity positions and found that a measure known as “density” is historically stretched. More specifically, Goldman found that the average hedge fund holds 70% of its long portfolio in its top 10 positions — the highest portion since at least 2002.
But why exactly does this metric matter? Because when positions get crowded like this, it leaves investors vulnerable to sharp sell-offs.
That’s because, at the first sign of stress, investors jammed into the same holdings will simultaneously stampede towards the exits. And that, in turn, can make a bad situation worse when it comes to a major market meltdown — especially for those who get out last.
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So it almost goes without saying that — in …read more
Source:: Business Insider