Because of the massive amount of capital they manage (over $3 trillion), hedge funds’ collective buying and selling activity can have a significant effect on the direction of the overall market as well as that of individual stocks. Heading into the market turmoil of Q4, equity hedge funds’ exposure to the S&P 500 was at record highs, nearly touching 70% in early-October after steadily rising for months from less than 30% in early-2018. Check out the 30 Most Popular Stocks Among Hedge Funds for examples of some of the stocks they were crowded into.
That was bad news for investors when the market started stumbling in October, as hedge funds have been rapidly selling off stocks since then, dropping their exposure back down to 40% in the span of two months, which has contributed to the intensity of the market downturn. Based on historical precedent, the selling may not be over yet, as hedge funds have typically lowered their exposure to between 20-30% during tough market conditions, which could hold back a market rebound for a little longer.
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Even as hedge funds were still raising their exposure to equities in Q3, there were numerous stocks that they were selling off in droves. Of the following 10 stocks, all of which had net declines in hedge fund ownership of at least 20% during Q3, only one has posted positive gains in Q4 and just barely at that, as that stock is up by less than 1% since the end of September. While that isn’t totally surprising, as the market has been dreadful over the past three months, these 10 stocks have underperformed even that lowly benchmark, losing an average of 12.41% this quarter (the S&P 500 is down by 9.64%).
| Company | Ticker | No of HFs (Q3) | No of HFs (Q2) | Q4 Returns (through 12/7/2018) |
|---|---|---|---|---|
| Lam Research Corporation | LRCX | 34 | 43 | -9.01% |
Lam Research Corporation (NASDAQ:LRCX) was being sold off by hedge funds even before the company’s CEO resigned due to allegations of misconduct. It was the second straight quarter of intense selling of the stock by hedge funds.
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