What is the Magnificent Seven and Are LPs Paying Hedge Funds Too Much for It?
Posted on 11/21/2023
Hedge funds are paid to generate alpha and excess returns, but many of the big ones are betting on U.S. tech stocks, like their large SWF and public pension counterparts. Are these hedge fund investors paying 2/20 to hold a long Nasdaq Short S&P 500 portfolio?
When ChatGPT went public with its testing site, the AI craze flooded U.S. equity markets (Wall Street), as tech stocks benefited from the news. Just like “blockchain” and “dotcom” before it, AI is becoming another buzzword.
Goldman Sachs issued its Hedge Fund Trend Monitor report that says megacap growth and technology stocks accounted for 13% of the aggregate hedge fund long portfolio, twice their weight at the start of 2023. The study is based on 13-F filings and supplemented with research data from Goldman Sachs’ prime brokerage desk. Hedge funds and large public pensions and sovereign wealth funds that track market cap indices are heavily exposed to U.S. technology stocks such as Apple Inc., Microsoft Corporation, Amazon.com, Inc. The report says that concentration in hedge funds portfolios have risen. Hedge fund crowding is now the most extreme it has been in the 22 years that Goldman Sachs has tracked hedge fund positioning, narrowly beating the previous high from 2016.
Crowding refers to situations in which investors take similar positions that see their trading strategies overlap.
Magnificent 7 Stocks
Microsoft
Alphabet (Google)
Apple
Nvidia
Tesla, Inc.
Amazon
Meta (Facebook)
Goldman Sachs wrote that asset managers upped their bets on the “Magnificent 7” tech stocks. Goldman Sachs analyzed the return of these stocks so far for 2023, and it was 31% versus the S&P 500 index benchmark return of 19%. The Goldman report analyzed the holdings of 735 hedge funds with US$ 2.4 trillion of gross equity positions. It showed the average hedge fund held 70% of its long portfolio in its top 10 positions.
U.S. tech stocks have been a major driver of U.S. equity returns in the last few years. At one point, these U.S tech stocks were referred to as FANG stocks. The acronym “FANG” refers to the stocks of four popular American technology companies: Facebook (Meta), Amazon, Netflix, and Google (Alphabet).
Tiger Global Management
Tiger Global Management which has large allocation to U.S. tech startups and companies experienced some changes. Scott Shleifer is stepping down as head of private investing and transitioning to a senior adviser role. The hedge fund cites his decision to stay in Florida as reason for move. Chase Coleman, the firm’s founder, will now oversee the firm’s public and private investments. The move takes effect January 1, 2024, Chase Coleman said Tuesday in a letter to clients.
