Hedge funds, which have been heavily concentrated in the so-called “Magnificent Seven” tech stocks, are now gradually reducing their exposure to these high-flying companies, according to a report by the Financial Times citing analysis by Goldman Sachs.
Over the past year, Mag 7 stocks fuelled significant stock market rallies, but recent data suggests that big players in the hedge fund industry are starting to shift their strategies.
According to Goldmans Sachs’s analysis of recent 13F filings from hundreds of US hedge funds managing a combined $2.8tn in gross stock market positions, there has been a modest yet noticeable rotation away from some of the most popular tech stocks. This trend even extends to Nvidia, a long-time darling among hedge funds.
The number of hedge funds holding one of the Mag 7 as a top-10 position has decreased across the board, with the sole exception being Apple. The number of funds with Apple as a top-10 holding rose to 43 by the end of the second quarter, up from 30 in the first quarter.
Interestingly, Tesla, despite being part of the Mag 7, is an outlier. It has such low exposure among hedge funds that it doesn’t even appear in Goldman’s data.
When looking at the absolute number of hedge funds with positions in these tech giants, the trend is similar. While a few more funds added Apple and Amazon to their portfolios in the second quarter, the general pattern has been one of trimming positions. Notably, concerns over Nvidia seem to be benefiting Taiwan Semiconductor Manufacturing Company, as some funds pivot their focus.
Currently, the Mag 7 stocks make up just 13% of the average hedge fund portfolio, and Goldman’s hedge fund crowding metric, which measures portfolio similarities across the industry, has slightly decreased. This repositioning has contributed positively to hedge fund performance, particularly as several of the Mag7 stocks experienced volatility this summer. Goldman Sachs estimates that traditional US long-short equity hedge funds are up 9% this year.
Despite the overall reduction in Big Tech positions, certain stocks remain heavily owned by hedge funds. These “hedge fund hotels” include companies like Hess, TransDigm, Tenet Healthcare, AerCap and US Steel, with funds holding substantial stakes – sometimes as high as 20% – in these firms.
Goldman’s analysis also highlights that hedge fund density –the concentration of a fund’s 10 largest positions relative to its total portfolio – has reached a record high of 72%, signalling a trend towards more focused, high-conviction investments, which, while potentially lucrative, also heightens the risk of significant market shocks being transmitted across various stocks.
