Investing.com -- Hedge funds are on pace to end 2024 on a high, with US equity long/short strategies showing a 14% year-to-date return, Goldman Sachs (NYSE:GS) revealed in a note. This is approximately double the average annual return over the past two decades.
The “Magnificent 7,” excluding Tesla (NASDAQ:TSLA), remain the most favored long positions among hedge funds, though there was some rotation within the group during the recent quarter.
Nvidia (NASDAQ:NVDA) emerged as a standout stock, which ranked on Goldman’s “Rising Stars” list with the largest increases in hedge fund popularity.
Tesla also saw increased exposure, while Apple (NASDAQ:AAPL) and Amazon (NASDAQ:AMZN) were among those seeing reduced positions, and are the two stocks included in Goldman’s ‘Falling Stars’ list.
More broadly, funds slightly reallocated away from large-cap stocks toward mid-caps in the third quarter.
While hedge funds have consistently increased exposure to AI-related themes over the past two years, these allocations largely stabilized in the third quarter. One exception was nuclear energy-exposed stocks, which saw notable interest.
At the industry level, Goldman notes that hedge funds reduced their exposure to semiconductors for the first time since the second quarter of 2022, redirecting capital into software companies.
Beyond Apple and Amazon, other AI-related names on the “Falling Stars” list include Dell (NYSE:DELL), HubSpot (NYSE:HUBS), Lam Research (NASDAQ:LRCX), Qualcomm (NASDAQ:QCOM), Super Micro Computer (NASDAQ:SMCI), and Western Digital (NASDAQ:WDC).
Earlier this year, funds had moved away from cyclical stocks in favor of defensive sectors. However, in the third quarter, they began incrementally rotating back toward cyclicals, increasing allocations to Financials and Consumer Discretionary stocks while reducing exposure to Health Care, Consumer Staples, and Real Estate.
Health care had the largest net sector weight entering the fourth quarter, accounting for 17% of total net exposure and holding a significant overweight position compared to the Russell 3000. In contrast, Information Technology remained the most underweight sector.
However, there was some rotation within Health Care as funds shifted capital toward TMT sectors last quarter.
“Funds also increased their tilts to Consumer Discretionary and to Financials, where hedge funds currently carry the largest overweight relative to the Russell 3000 in at least 15 years,” Goldman adds.
On a sector-neutral basis, hedge funds began 2024 with a record tilt toward Growth but pivoted sharply toward Value during the third quarter.
As Chinese equities rallied late in the third quarter, hedge funds also added to positions in Chinese ADRs.
By the start of the fourth quarter, 25% of US hedge funds held long positions in at least one China ADR, marking the highest level since late 2021. Among these, JD (NASDAQ:JD).com stood out with the largest net increase in US hedge fund ownership.
Moreover, hedge funds increased their positions in the IBIT Bitcoin ETF last quarter, pushing the ETF's share in hedge fund long portfolios to its highest level since 2012.