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Hedge Funds Are Dumping Goldman Sachs Group, Inc. (GS)

It is already common knowledge that individual investors do not usually have the necessary resources and abilities to properly research an investment opportunity. As a result, most investors pick their illusory “winners” by making a superficial analysis and research that leads to poor performance on aggregate. Since stock returns aren’t usually symmetrically distributed and index returns are more affected by a few outlier stocks (i.e. the FAANG stocks dominating and driving S&P 500 Index’s returns in recent years), more than 50% of the constituents of the Standard and Poor’s 500 Index underperform the benchmark. Hence, if you randomly pick a stock, there is more than 50% chance that you’d fail to beat the market. At the same time, the 30 most favored S&P 500 stocks by the hedge funds monitored by Insider Monkey generated a return of 15.1% over the last 12 months (vs. 5.6% gain for SPY), with 53% of these stocks outperforming the benchmark. Of course, hedge funds do make wrong bets on some occasions and these get disproportionately publicized on financial media, but piggybacking their moves can beat the broader market on average. That’s why we are going to go over recent hedge fund activity in Goldman Sachs Group, Inc. (NYSE:GS).

Goldman Sachs Group, Inc. (NYSE:GS) shareholders have witnessed a decrease in activity from the world’s largest hedge funds of late. GS was in 57 hedge funds’ portfolios at the end of the third quarter of 2018. There were 61 hedge funds in our database with GS holdings at the end of the previous quarter. Our calculations also showed that GS isn’t among the 30 most popular stocks among hedge funds.

Hedge funds’ reputation as shrewd investors has been tarnished in the last decade as their hedged returns couldn’t keep up with the unhedged returns of the market indices. Our research has shown that hedge funds’ small-cap stock picks managed to beat the market by double digits annually between 1999 and 2016, but the margin of outperformance has been declining in recent years. Nevertheless, we were still able to identify in advance a select group of hedge fund holdings that outperformed the market by 18 percentage points since May 2014 through December 3, 2018 (see the details here). We were also able to identify in advance a select group of hedge fund holdings that underperformed the market by 10 percentage points annually between 2006 and 2017. Interestingly the margin of underperformance of these stocks has been increasing in recent years. Investors who are long the market and short these stocks would have returned more than 27% annually between 2015 and 2017. We have been tracking and sharing the list of these stocks since February 2017 in our quarterly newsletter.

Warren Buffett

Let’s take a look at the fresh hedge fund action encompassing Goldman Sachs Group, Inc. (NYSE:GS).

What have hedge funds been doing with Goldman Sachs Group, Inc. (NYSE:GS)?

Heading into the fourth quarter of 2018, a total of 57 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of -7% from one quarter earlier. The graph below displays the number of hedge funds with bullish position in GS over the last 13 quarters. With the smart money’s sentiment swirling, there exists an “upper tier” of key hedge fund managers who were boosting their stakes significantly (or already accumulated large positions).

No of Hedge Funds with GS Positions

The largest stake in Goldman Sachs Group, Inc. (NYSE:GS) was held by Berkshire Hathaway, which reported holding $4115.6 million worth of stock at the end of September. It was followed by Greenhaven Associates with a $755.6 million position. Other investors bullish on the company included Eagle Capital Management, Pzena Investment Management, and GLG Partners.

Because Goldman Sachs Group, Inc. (NYSE:GS) has witnessed declining sentiment from the smart money, logic holds that there lies a certain “tier” of hedge funds who were dropping their full holdings by the end of the third quarter. It’s worth mentioning that Jim Simons’s Renaissance Technologies said goodbye to the largest investment of the 700 funds watched by Insider Monkey, worth about $176.8 million in call options. Benjamin A. Smith’s fund, Laurion Capital Management, also dropped its call options, about $33 million worth. These transactions are interesting, as aggregate hedge fund interest fell by 4 funds by the end of the third quarter.

Let’s check out hedge fund activity in other stocks similar to The Goldman Sachs Group, Inc. (NYSE:GS). We will take a look at Schlumberger Limited. (NYSE:SLB), Morgan Stanley (NYSE:MS), Banco Santander, S.A. (NYSE:SAN), and ASML Holding N.V. (NASDAQ:ASML). This group of stocks’ market values resemble GS’s market value.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
SLB 55 1514319 12
MS 51 4642452 2
SAN 19 754414 -1
ASML 13 525470 1
Average 34.5 1859164 3.5

View table here if you experience formatting issues.

As you can see these stocks had an average of 34.5 hedge funds with bullish positions and the average amount invested in these stocks was $1.86 billion. That figure was $6.88 billion in GS’s case. Schlumberger Limited. (NYSE:SLB) is the most popular stock in this table. On the other hand ASML Holding N.V. (NASDAQ:ASML) is the least popular one with only 13 bullish hedge fund positions. Compared to these stocks Goldman Sachs Group, Inc. (NYSE:GS) is more popular among hedge funds. Considering that hedge funds are fond of this stock in relation to its market cap peers, it may be a good idea to analyze it in detail and potentially include it in your portfolio.

Disclosure: None. This article was originally published at Insider Monkey.

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