The writing was kind of on the wall at the end of March. S&P 500 Index was near the 4600 level whereas inflation rate was close to 8% and the 10-year Treasury yield jumped to 2.7%. The probability of further increases in interest rates and sharp declines in the stock market was much larger than the probability of further gains in stock prices. So, we started telling our premium subscribers to short the market at the end of March. Most hedge funds interpreted the macro developments the same way we did and reduced their exposure. The total value of stock holdings in hedge funds’ portfolios went down from $3.1 trillion at the end of December to $2.8 trillion at the end of March.
This isn’t a terribly large reduction in market exposure, but it is still a reduction. It still shows that hedge funds have a slight edge in market timing.
Insider Monkey has long been a believer of imitating the top stock picks of hedge funds, and this approach has helped us beat the market on average over the last several years. For instance, between March 2017 and April 2022 our monthly newsletter’s stock picks returned 159.9%, vs. 89.8% for the SPY. Our stock picks outperformed the market by 70 percentage points.
We don’t talk much about our monthly newsletter’s stock picks publicly, but we have been sharing the list of 30 most popular stocks among hedge funds here at Insider Monkey since the end of 2018. The majority of these stocks aren’t traditional value stocks. You can check out the latest list of the 30 most popular hedge fund stocks here. You can also check out our three previous articles about the 30 most popular hedge fund stocks at the end of 2021, 2021 Q3 and 2021 Q2 here.
Overall, hedge funds’ top 5 stock picks returned 29.6% in 2021 and beat the market by 3.6 percentage points. From 2014 through the end of 2021, these 5 stocks returned 324.5% and beat the S&P 500 Index by 131 percentage points. So, this year the S&P 500 Index started to close the performance gap, but we believe this is just a temporary blip and when the bull market resumes, hedge funds’ top stock picks will resume their historical trajectory of strong outperformance.
Every quarter we process more than 900 hedge funds’ 13F filings and identify the top stocks among ALL 900+ hedge funds. In this article we are going to take a look at 10 stocks that hedge funds dumped the most or dropped out of hedge funds’ top 30 stocks list.
10. Danaher Corporation (NYSE: DHR)
Number of Hedge Funds: 83 (2022Q1)
Number of Hedge Funds: 87 (2021Q4)
Number of Hedge Funds: 74 (2021Q3)
Total Dollar Amount of Long Hedge Fund Positions: $6.2 billion
Percent of Hedge Funds with Long Positions: 9.1%
Popularity Ranking (2021Q4):29
Popularity Ranking (2021Q3): 42
Noteworthy Hedge Fund Shareholders: Dan Loeb, Barry Dargan
Danaher Corporation ranked 29th among the 30 most popular stocks among hedge funds at the end of December. During the first quarter the number of hedge funds with bullish Danaher Corporation positions declined by 4. This is usually not enough to cause any alarms but because of this decline Danaher isn’t one of the top 30 hedge fund stocks anymore. D1 Capital, Sculptor Capital, Element Capital and Islet Management were among the hedge funds that dumped Danaher Corporation (DHR) during the first quarter.
9. Tesla Inc. (NASDAQ: TSLA)
Number of Hedge Funds: 80 (2022Q1)
Number of Hedge Funds: 91 (2021Q4)
Number of Hedge Funds: 60 (2021Q3)
Total Dollar Amount of Long Hedge Fund Positions: $11.3 billion
Percent of Hedge Funds with Long Positions: 8.8%
Popularity Ranking (2021Q4): 26
Popularity Ranking (2021Q3): 102
Noteworthy Hedge Fund Shareholders: Cathie Wood, Motley Fool Asset Management
Tesla Inc. (TSLA) was the 26th most popular stock among hedge funds at the end of December. During the first quarter eleven hedge funds (net change) sold out of Tesla Inc. As a result, Tesla isn’t among the 30 most popular stocks among hedge funds. Ursa Fund Management, Deepcurrents Investment Group, and Viking Global sold out of Tesla Inc. All of these hedge funds had at least $180 million invested in Tesla Inc. at the end of December. Not everyone was bearish though. Here is what Baron Funds said about Tesla:
“During the first quarter, we bought back shares inTesla, Inc., which designs, manufactures, and sells electric vehicles, solar products, energy storage solutions, and batteries. We believe that despite the run in the stock over the last few years, Tesla presents a favorable risk/reward profile and remains a Big Idea with only about 1% market share of the automotive market. Since we bought the stock during the first quarter, shares increased 27.1%, despite a complex supply-chain environment, on continued revenue growth and record profitability. Robust demand and operational optimization allow the company to offset inflationary pressures while vertical integration provides flexibility around supply bottlenecks. Moreover, we expect new localized manufacturing capacity to drive additional efficiencies while software initiatives, including the autonomous driving program, are accelerating, offering valuable optionality to the stock.”
8. Block Inc. (NYSE: SQ)
Number of Hedge Funds: 84 (2022Q1)
Number of Hedge Funds: 96 (2021Q4)
Number of Hedge Funds: 98 (2021Q3)
Number of Hedge Funds: 94 (2021Q2)
Total Dollar Amount of Long Hedge Fund Positions: $6.2 billion
Percent of Hedge Funds with Long Positions: 9.2%
Popularity Ranking (2021Q4): 21
Popularity Ranking (2021Q3): 18
Popularity Ranking (2021Q2): 22
Noteworthy Hedge Fund Shareholders: Bares Capital Management, Cathie Wood
Block Inc (SQ) was the 21st most popular stocks among hedge funds at the end of December. The stock was in 96 hedge funds’ portfolio at the time. There was a net decline of 12 hedge funds during the first quarter and Block Inc. dropped out of the top 30 hedge fund stocks list. Here is how Ferrer Wealth Advisors explained why they dumped Block Inc. (SQ):
“Block(formerly Square): We ‘adopted’ Block’s stock after the company bought Afterpay, which we were investors in. We had been trimming the Afterpay position throughout 2021 and trimmed again after the acquisition, so the position was quite small. We held onto that small portion, as we did think the acquisition made sense and were excited to see the two companies integrate and for Block to create a closed loop network between merchants and consumers. However, the market punished most highly valued tech stocks over the last months, and we saw the position move against us by over 50%. We are firm believers that when a stock goes against you by 50%+, you need to do something about it. Either trim/sell and reinvest or buy more. In the case of Block, the original reason for holding was to see how the acquisition and integration with Afterpay panned out. The market did not give us the time to see this play out, thus we were not comfortable adding more to the position. Further for the stock to recover to our purchase price, we felt the company’s valuation would need to command a future exit multiple that the market would be unlikely to pay in this environment. Given this, we exited the remainder of the position.”(Video) "How To Make Millions In A Market Crash" — Peter Lynch
7. Shopify Inc. (NYSE: SHOP)
Number of Hedge Funds: 72 (2022Q1)
Number of Hedge Funds: 86 (2021Q4)
Number of Hedge Funds: 73 (2021Q3)
Total Dollar Amount of Long Hedge Fund Positions: $5.8 billion
Percent of Hedge Funds with Long Positions: 7.9%
Popularity Ranking (2021Q4): 30
Popularity Ranking (2021Q3): 49
Noteworthy Hedge Fund Shareholders: Cathie Wood, Lone Pine Capital
Shopify Inc. (SHOP) saw a large inflow of hedge funds during the fourth quarter of 2021 as SHOP shares peaked at $1770. Unfortunately, Shopify Inc. (SHOP) tanked, and hedge funds rushed to the exits during the first quarter. The number of bullish SHOP positions among hedge funds declined by 14 during the first quarter. Shopify Inc (SHOP) shares declined close to 50% since then, so hedge funds like Egerton Capital, D1 Capital, and Coatue made the right move. Here is what Baron Global Advantage Fund said about Shopify Inc. (SHOP) recently:
“Shopify Inc.is a cloud-based software provider offering an operating system for multi-channel commerce. Shopify has been adopted by over two million merchants who processed $175 billion of gross merchandise volume in 2021, making it the second largest e-commerce player in the U.S. The stock corrected sharply in the first quarter, declining 51%, as a result of investor rotation out of fast-growing, long-duration stocks and after the company released quarterly results, expecting a normalization in the rapid growth it has experienced during the early stages of the pandemic. We remain shareholders as we believe Shopify has a long runway for growth addressing less than 1% of global commerce spending with a unique and competitively advantaged platform.”
Cathie Wood of ARK Investment Management
6. General Motors (NYSE:GM)
Number of Hedge Funds: 76 (2022Q1)
Number of Hedge Funds: 90 (2021Q4)
Number of Hedge Funds: 77 (2021Q3)
Total Dollar Amount of Long Hedge Fund Positions: $5.5 billion
Percent of Hedge Funds with Long Positions: 8.3%
Popularity Ranking (2021Q4): 28
Popularity Ranking (2021Q3): 36
Noteworthy Hedge Fund Shareholders: Warren Buffett, Greenhaven Associates
General Motors was among the 30 most popular hedge fund stocks at the end of December, but that was short lived. The number of bullish hedge fund positions in GM went down by 14 during the first quarter as billionaires like David Tepper, George Soros, and Louis Bacon dumped General Motors (GM) shares. Here is what Oakmark Global Fund has to say about General Motors Company (NYSE:GM) in its Q1 2022 investor letter:
“General Motors(NYSE:GM) was a detractor during the quarter, due to increased macro uncertainty, higher fuel prices, and concerns over rising input costs, which pressured the company in particular and the auto industry as a whole. While we are closely monitoring the potential impact of these dynamics, industry demand remains robust, driven by strong consumer balance sheets and pent-up demand after multiple years of constrained production. We also remain confident in GM’s ability to navigate a complex operating environment, which the company has consistently demonstrated over the past few years. Finally, the long-term picture remains bright. We believe GM is significantly undervalued, is well-positioned for the long-term transition to electric vehicles and has numerous needle-moving ancillary business opportunities (most notably Cruise, which is an industry leader in autonomous vehicle technology) that are underappreciated.”
Click to continue reading and see the Top 5 Stocks Hedge Funds Dumped Before the Market Crash.
Disclosure: None. 10 Stocks Hedge Funds Are Dumping is originally published at Insider Monkey.
REITS—Real Estate Investment Trusts
Because they invest in real estate, REIT performance may be less correlated to the stock market, making them a good hedge against crashes. As an added bonus, they generally pay higher dividends than many other investments.
2008: In response to the housing bubble and subprime mortgage crisis, the S&P 500 lost nearly half its value and took two years to recover.
Global hedge funds that bet on equity markets suffered the biggest withdrawals, losing $6.4 billion of the net outflows, Citco's report showed. U.S.-based hedge funds were big losers, followed by those in Asia and in Europe.
Keep a broadly diversified allocation, an emergency fund equal to at least 6 months of personal living expenses, and keep a high savings rate. Invest money in stocks throughout the market decline and pick up shares of companies at wholesale prices.
The bear market in the S&P 500 was confirmed on June 13th 2022, but the market began its slide on January 3rd 2022. With this date as the start of the current official bear market, the average bear market of 289 days means that it would finish on 19th October 2022.
There are several effective hedging strategies to reduce market risk, depending on the asset or portfolio of assets being hedged. Three popular ones are portfolio construction, options, and volatility indicators.
Our experts agree that it's likely to be a bumpy road ahead for the remainder of 2022. But, crash or no crash, recession or not, history tells us time and time again this is part of the journey.
The nation's GDP fell 1.6 percent on an annualized basis in first quarter 2022 and was followed by a 0.9 percent drop in the second quarter. However, we find that most indicators—particularly those measuring labor markets—provide strong evidence that the U.S. economy did not fall into a recession in the first quarter.
According to the general definition—two consecutive quarters of negative gross domestic product (GDP)—the U.S. entered a recession in the summer of 2022. The organization that defines U.S. business cycles, the National Bureau of Economic Research (NBER), takes a different view.
Globally, funds that buy and sell stocks have seen their cumulative returns drop 12.24% in the 12 months ending July 31, investment data provider Preqin said. Year to date cumulative returns for 2022 were down 11.42%.
Bridgewater is the world's largest hedge fund, with about $150 billion in capital. Since its founding in 1975, Bridgewater has returned $52.2 billion in gains to its investors – more than any other hedge fund on the planet. Like Renaissance, Bridgewater is another firm with a strong, iconic founder: Ray Dalio.
The largest asset manager in the world, BlackRock Inc. confirmed it suffered a loss of $1.7 trillion in the first half of 2022. In a time of rising oil prices and unbridled inflation, financial markets saw a carnage that saw widening losses for investors in crypto, NFTs and blue-chip stocks as well.
Source: FE, as at 1 July June 2022. Basis: bid-bid in local currency terms with income reinvested. According to APNews, bear markets since World War II have taken an average of 13 months to go from peak to trough, whereas the average time for the stock market to recover stands at 27 months.
In theory, selling your stocks right before a market downturn is a smart strategy. You'll be selling when prices are still high, then you can reinvest once prices are at rock bottom to make a hefty profit.
The S&P 500 should then recover to 3,900 by the end of 2023, or 3,350 in a recessionary scenario, according to Morgan Stanley.
According to Seeking Alpha — which analyzed every bear market since 1928 — the longest-ever bear market occurred in 1973-74, when it lasted 630 days, or about 21 months. The stock market shed about 48% during that period. The second-longest bear market, from 1980-82, lasted 622 days.
Eventually, investors begin to find stocks attractively priced and start buying, officially ending the bear market. Bear markets are characterized by investors' pessimism and low confidence. During a bear market, investors often seem to ignore any good news and continue selling quickly, pushing prices even lower.
Investing in bonds is also a common strategy to protect oneself during a bear market. Bond prices often move inversely to stock prices, and if stocks decline, a bond investor could stand to benefit. Short-term bonds in a bear market could help investors weather the (hopefully) short-term downturn.
Hedging is a strategy that tries to limit risks in financial assets. It uses financial instruments or market strategies to offset the risk of any adverse price movements. Put another way, investors hedge one investment by making a trade in another.
As a rule, long-term put options with a low strike price provide the best hedging value. This is because their cost per market day can be very low. Although they are initially expensive, they are useful for long-term investments.
Some examples of hedge funds include names like Munoth Hedge Fund, Forefront Alternative Investment Trust, Quant First Alternative Investment Trust and IIFL Opportunities Fund. There are others such as Singlar India Opportunities Trust, Motilal Oswal's offshore hedge fund and India Zen Fund.
Any way you look at it, a stock market crash happens when confidence and value placed in publicly traded assets goes down, causing investors to sell their positions, and move away from active investing, and toward keeping their money in cash, or the equivalent. The impact of a crash can vary as well.
|2015–2016 stock market selloff||18 Aug 2015|
|2018 cryptocurrency crash||20 Sep 2018|
|2020 stock market crash||24 Feb 2020|
|2022 stock market decline||3 Jan 2022|
The tech-heavy Nasdaq 100 has dropped nearly 33 percent so far in 2022, the Dow Jones Industrial Average lost more than 20 percent while the world's best-known cryptocurrency, Bitcoin, shed nearly 60 percent of its value.
“While recessions hurt, inflation can trigger a systematic decline in the economy and its efficiency,” he adds. Inflation is so damaging because it erodes purchasing power, punishes the poor and may trigger a destructive wage-price spiral as workers demand more pay to keep up.
How home prices might change in a recession. While the cost of financing a home typically increases when interest rates are on the rise, home prices themselves may actually decline. “Usually, during a recession or periods of higher interest rates, demand slows and values of homes come down,” says Miller.
The Fed's rapid rate hikes have raised the likelihood of recession in the next two years to nearly 50%, Goldman Sachs economists have said. And Bank of America economists now forecast a "mild" recession later this year, while Deutsche Bank expects a recession early next year.
A recession is now likely in 2023. Here's what could trigger a sharp downturn in the economy. The economy appears to be on solid footing, with strong job growth. But warnings signs are mounting.
- Invest in self-storage. ...
- Rent out a popular item. ...
- Build a real estate portfolio. ...
- Self-publish books. ...
- Open a savings account.
The U.S. housing market recession to carry over into 2023
Year-over-year change in private residential fixed investment GDP (i.e. U.S. housing activity). On a year-over-year basis, the ongoing housing downturn has seen new home sales and existing home sales fall by 29.6% and 20.2%.
High-Risk. In general, hedge funds are considered to be high-risk investments because of the huge potential for money loss. Again, these funds are primarily controlled by hedge funds managers, and with pools of money going into investments, there is likely going to be some loss.
Cash and Cash Equivalents
Cash is the most liquid asset possible as it is already in the form of money. This includes physical cash, savings account balances, and checking account balances.
Hedge funds offer some worthwhile benefits over traditional investment funds. Some notable benefits of hedge funds include: Investment strategies that can generate positive returns in both rising and falling equity and bond markets. The reduction of overall portfolio risk and volatility in balanced portfolios.
Hedge fund management firms are often owned by their portfolio managers, who are therefore entitled to any profits that the business makes. As management fees are intended to cover the firm's operating costs, performance fees (and any excess management fees) are generally distributed to the firm's owners as profits.
Hedge funds make money by charging a management fee and a percentage of profits. The typical fee structure is 2 and 20, meaning a 2% fee on assets under management and 20% of profits, sometimes above a high water mark.
Jim Simons is back on top. For the fifth time in seven years, the 83-year-old founder of quant specialist Renaissance Technologies leads Institutional Investor's Rich List, the definitive ranking of the highest-earning hedge fund managers.
As of 2022, Vanguard has more than $8 trillion in assets under management (AUM), second only to BlackRock, Inc ($9.5 trillion AUM). 4 Headquartered in Pennsylvania, Vanguard is the largest mutual funds issuer in the world and the second-largest issuer of exchange-traded funds (ETFs).
BlackRock has evolved from a small startup to a global conglomerate. This market giant invests in experimenting in all areas, and as a result, it owns shares and voting rights in several of Europe's largest firms, including those in energy, oil and gas, and, of course, banking.
Go for Safety: Government Bonds
With inflation at generational highs and interest rates near all-time lows, consider putting some of your money into Treasury Inflation-Protected Securities. They offer attractive returns and liquidity after 12 months. Also, don't overlook Series I Savings Bonds.
Perhaps the most basic way of hedging against a stock market crash is to buy in-the-money (ITM) puts on equities index futures. Buying a put gives the holder the right, but not the obligation, to sell a futures contract at a specific price on some forthcoming date in time.
Buy Bonds during a Market Crash
Down markets are also a chance for investors to consider an area that novice investors might miss: Bond investing. Government bonds are generally considered the safest investment, though they are decidedly unsexy and usually offer meager returns compared to stocks and even other bonds.
Other smart advice for protecting your portfolio against a market crash includes hedging your bets by playing the options game; paying off debts to keep a stable balance sheet, and using tax-loss harvesting to mitigate your losses.