Hedge fund managers tracked by the AlphaClone Hedge Fund Long/Short Index distanced themselves from financial sector investments in the second quarter, representing a steep reversal from the previous quarter in which financials were the index’s most overweight sector relative to the S&P 500.
“The bearish stance may illustrate conviction among hedge funds that financials are fully valued at these levels, especially in light of various high profile scandals that affected the sector negatively,” says Mazin Jadallah (pictured), chief executive of AlphaClone.
Notable financial companies in which the index has sold out include Citigroup, JP Morgan Chase and Hartford Financial. Despite the underweighting, financials are still the second-largest sector represented in the index at a 13 per cent allocation. Financial names the index continues to hold include Bank of America, American International Group and Alleghany, with the latter representing a new index constituent.
Construction and business services sectors maintained their high relative overweights from the previous quarter, while industrial products shifted from the fifth-lowest to the fifth-highest relative weighting this quarter. Prominent construction holdings in the index include homebuilder NVR, while credit card firms such as MasterCard and VISA and data-driven marketing solutions provider Alliance Data Systems represented some of the index’s business services holdings.
Computer and technology stocks, despite a small reduction in relative exposure, account for the greatest share of AlphaClone’s index this quarter at a 21 per cent overall allocation. Apple continues to be the index’s largest single holding while Facebook and TripAdvisor were new additions.
The AlphaClone Hedge Fund Long/Short Index has returned 11.5 per cent this year through August, compared to -0.59 per cent for the Dow Jones Credit Suisse Core Equity Long/Short Index and 11.9 per cent for the S&P 500.
The index is composed of US equity securities selected based on a proprietary hedge fund position replication methodology developed by AlphaClone. The methodology ranks hedge funds and institutional investors based on the efficacy of replicating their publicly disclosed positions and selects equities from those managers with the highest ranking. To manage risk, the index employs a dynamic hedging mechanism that can vary the index from being 100 per cent long to up to 50 per cent short, or “market hedged,” based on market volatility targets defined by the methodology.