Hedge funds and mutual funds are split on the elite group of FAAMG stocks — and that’s led to a big performance gap

• Tech giants are the most crowded they've been in decades, but not all fund managers are piling in with the rest of the market, according to Goldman Sachs.
• Hedge funds have boosted their bets on the FAAMG group — Facebook, Amazon, Apple, Microsoft, and Google-parent Alphabet — while mutual funds are underweight on the mega-caps.
• The split is already showing up in funds' performances. Goldman Sachs' hedge fund basket is up 19% year-to-date, beating the S&P 500's 6% gain.
• The bank's mutual fund overweights basket is down 1% in 2020, and its mutual fund underweights gauge is up only 4%.
• Part of the split is linked to mutual funds' concentration caps. While investors parked more cash in tech giants, mutual fund managers had to find steady gains in other sectors to avoid risks associated with such crowding.
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The stock market's favorite mega-caps account for nearly 25% of the S&P 500, but fund managers can't decide whether they're worth buying, according to Goldman Sachs.

The FAAMG coalition — Facebook, Amazon, Apple, Microsoft, and Google-parent Alphabet — led major indexes higher through the summer, with the S&P 500 and Nasdaq composite now sitting at record levels. Yet strategists fear the run-up is overextended, and that such concentration in a select few names could tank stocks if any of the tech giants falters.

In one corner, hedge funds are crowding into the growth darlings. Goldman Sachs' Hedge Fund VIP basket has added to FAAMG positions for 23 straight quarters, and all constituents but Apple have been in the list's top five picks for 12 consecutive quarters, analysts led by David Kostin said Friday.

In the other, mutual funds are significantly underweight in the tech group. Such firms are most underweight in Apple compared to the rest of the market, with Microsoft and Amazon following close behind. Part of their positioning has to do with concentration limits, as mutual funds can't park swaths of client cash into a small set of names.

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That gap in FAAMG ownership has already driven a wedge between the funds' performances. Goldman Sachs' hedge fund basket — which tracks hedge funds' most popular long positions — is up roughly 19% year-to-date, outperforming the S&P 500 by 13 percentage points.

Mutual funds fared far worse. Goldman's mutual fund overweights basket is down 1% year-to-date. The firm's mutual fund underweights gauge, which held Apple, Amazon, and Microsoft last quarter, is up only 4% over the same period.

Stock picks aren't the only factor driving the major performance divide. Mutual funds' concentration caps eroded firms' gains over time as the broader market parked more cash into tech giants and funds had to find strong names elsewhere.

Meanwhile, hedge funds simply followed the market and sank more capital into their FAAMG positions. Though portfolio concentration dropped slightly in the second quarter, hedge fund crowding remains at historic highs. The average hedge fund holds 67% of its long portfolio in its top 10 positions, according to Goldman Sachs.

The split is forming a broader gap between the two kinds of funds, the bank added. Hedge funds' infatuation with tech giants has formed a record shift away from value stocks. Mutual funds tout a similarly strong tilt toward value stocks to make up for its smaller stake in FAAMG names, according to Goldman.

Unless investors broadly shift toward value names and cut down on tech concentration, mutual funds' value skew will weigh on their performance in 2020, the analysts added.

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