Goldman Sachs uncovered an investing strategy that's beaten the stock market for the last 15 years - here are the stocks it says you should be buying and dumping right now
- Strategists at Goldman Sachs examined the stocks that hedge funds buy and sell en masse within a given quarter, and found a consistent pattern.
- Stocks that surge in popularity among hedge funds go on to outperform the market in the subsequent quarter and year, they said.
- They also included lists of the companies that saw the biggest changes in popularity during the third quarter.
When hedge funds make moves, investors everywhere pay attention.
Their sheer size gives them market-moving prowess, along with the ability to engage in activism that changes how companies are structured.
One way to keep track of what hedge funds are up to is by looking at their stock holdings, which they're required to disclose quarterly in 13-F filings.
Goldman Sachs' closer examination of funds with $2.2 trillion of gross equity positions showed that hedge-fund activity not only provides insight into the previous three months, but also signals where stocks are headed.
Specifically, Goldman's strategists went beyond their usual examination of the most popular holdings, and looked into changes in popularity - which stocks hedge funds bought or sold en masse within a given quarter.
"Our new analysis shows that stocks experiencing the largest increase in number of hedge fund owners go on to outperform sector peers by an average of 60 bp during the subsequent quarter and 100 bp during the subsequent 12 months," Goldman's Ben Snider said in a note.
"'Falling star' stocks with the largest decline in number of owners have subsequently underperformed peers by a similar magnitude. Stocks with the highest number of hedge fund owners have also gone on to outperform less widely-owned stocks on average, but by a much smaller magnitude."
These dynamics have played out during the last 15 years, Snider said.
Quarterly hedge fund disclosures typically come with the caveat that the funds may have exited the positions they disclose, or added new positions since the end of the prior quarter. Still, Goldman's analysis finds that it pays to buy stocks that have recently experienced a surge in hedge fund buying.
The reverse is also the case, Snider said. Stocks that hedge funds dump in sync tend to underperform in the following quarter.
Amid the ongoing market correction, it may be more instructive to pay more attention to the companies that hedge funds are selling.
Funds have cut their gross and net exposures to stocks to the lowest levels since the first half of 2017, according to Snider. Their selling has put more downward pressure on the stock market and on fund performance, which is now down 4% year-to-date on average, he added.
Here are the stocks hedge funds dumped in the third quarter:
And here are the so-called rising stars: