Hedge funds change direction: Migration to cyclical sector ahead of US election

Hedge funds reduced their exposure to semiconductor stocks in the final quarter for the first time since 2022, while increasing allocations to cyclical sectors. That positions the funds well ahead of the U.S. presidential election, according to Goldman Sachs’ “Hedge Fund Trend Monitor” for the third quarter. After reducing their exposure to cyclical stocks earlier this year, hedge funds shifted back partially to cyclical industries at the expense of defensive ones in the third quarter, according to a survey of 697 hedge funds with a combined $3 trillion in holdings.

The adjustment to cyclical sectors includes adding positions in financials and consumer cyclicals and reducing exposure to healthcare, consumer staples and real estate. The “Magnificent 7,” excluding Tesla, remains the most popular long position among hedge funds, although funds reallocated their exposure within that group during the quarter. They reduced their long positions in semiconductor stocks for the first time since the second quarter of 2022 and increased their positions in the software sector. Funds added exposure to Nvidia, which made Goldman’s “Rising Stars” list with significant increases in popularity among hedge funds, while reducing their positions in Apple and Amazon. Among the AI ​​stocks that made the “Falling Stars” list are Dell, HubSpot, Lam Research, Qualcomm, Super Micro Computer and Western Digital.

In addition, hedge funds continued to increase their exposure to Chinese stocks, with 25% of funds now owning at least one Chinese ADR, the highest share since 2021. Meanwhile, hedge fund long/short strategies for U.S. stocks are on track to return 14% year-to-date, about twice the average return over the past 20 years, according to Goldman Sachs strategies. The most popular long positions, excluding Tesla, remain in the “Magnificent 7,” which includes Apple, Microsoft, Alphabet, Amazon, Nvidia and Meta, according to the analysis by Goldman’s Ben Snyder team.

Hedge funds have been slowly shifting their portfolios toward cyclical industries from more stable ones, positioning them well for the changes that have occurred since Donald Trump’s victory in the U.S. presidential election. They reduced their exposures to: healthcare, consumer staples and real estate, while increasing their positions in the financial sector, which reached its highest relative weight in at least 15 years.

Funds also bought the IBIT Bitcoin ETF and returned to Chinese stocks in the third quarter. 25% of hedge funds now own at least one Chinese ADR, the highest share since 2021. Goldman Sachs strategists led by Ryan Hammond note that only 31% of large mutual funds, compared to a historical average of 38%, have outperformed their benchmarks since the beginning of the year. Mutual funds and ETFs have seen a surge in capital following the presidential election, similar to the situation after Donald Trump’s first victory in 2016. Mutual fund cash balances are currently at a record low.