How Have Hedge Funds Navigated the Recent Market Turmoil?
With the MSCI World Index down 20.3% in the first half of 2022, equity hedge funds have not been immune to recent market volatility, despite having reduced their net market exposure. With this in mind, we review how the exposure of equity hedge funds has changed in terms of sector and style factors.
A focus on high growth, volatility and technology
Historically, hedge funds' developed-market equity exposure has favored liquid high-risk growth stocks exhibiting positive momentum. This risk-on focus has produced an outsized allocation to the information-technology (IT), industrials and consumer-discretionary sectors. While these plays may have worked well in the past, some of these sectors have experienced significant drawdowns during the recent bear-market cycle.
Sector and style shifts
In line with this volatile trend, equity hedge funds have reduced their net-long exposure in 2022, from over 50% (at the end of 2021) to slightly above 30% by the end of April. Over the last 12 months, hedge funds' IT and consumer-discretionary exposure has decreased, while their exposure to the real estate and energy sectors marginally increased. However, IT is still one of their largest holdings. In terms of style factors, growth and high-volatility stocks continue to be favored (though with less emphasis), and they have a less-bearish stance on high-yielding, value and large-cap stocks.
Hedge funds' sector positioning and factor exposure over time
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Net exposure. Data from Dec. 2013 to April 2022.
Sector positioning and factor exposure as of April 2022
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Net exposure. Data as of April 29, 2022.
Where Do Hedge Funds Have Their Big Exposures?
Hedge funds play a large role in global capital markets. There is limited information about their portfolio holdings, however. As of November 2021, hedge funds in aggregate held the following positions, according to the MSCI Hedge Fund Crowding model.
Anatomy of Hedge Fund Portfolios
Measuring hedge funds’ positioning and potential crowding around stocks is of interest to many investors, given these funds’ reputation for outperformance.
Hedge Fund Crowding Factsheet
Measuring hedge fund positioning and potential crowding around stocks is of interest to many institutionalinvestors.
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