2021 has been another fascinating year for the stock markets. The vaccine rollout has been successful in the US and UK, allowing these economies to begin to return to normal. However, regulatory lockdowns by the Chinese government have led to hedge funds cutting their exposure on businesses that rely on China by 26%. So, the question needs to be asked: Which stocks are hedge funds investing in now?
Hedge Funds in 2021
Not all hedge funds have had the easiest of years. 2021’s meme stock frenzy burned a lot of short-sellers, with many hedge funds failing to account for — or understand — the suddenly arrived retail investors. However, some hedge funds have embraced “Reddit stocks,” like Paysafe, a favorite of retail investors and about 50 hedge funds.
Indeed, it seems that hedge funds have learned from the meme stock craze and have found a way to take advantage of the shifting landscape. So much so that many industry insiders suggest that hedge funds are making a resurgence.
This year, hedge fund short books generated their best alpha since 2010. Additionally, after three years of outflows, hedge funds saw over $6 billion in client inflows during Q1. According to data from HFR, this brings the industry’s managed assets up to almost $4 trillion.
Factors Affecting Inflows
And there is a reason for these inflows. After a challenging decade post-financial crisis, hedge funds produced excellent gains since the pandemic — posting returns of 11.8% in 2020 and 13% in 2021. Another sign of the times is that many hedge funds have stopped taking on new customers. Brevan Howard, a fund that struggled in 2019, has turned its fortunes around to the extent that it shut its doors to new investors earlier this year.
Another factor affecting inflows into hedge funds is the current unpredictability in China. These issues have led many institutional investors to pull money out of the region and invest with hedge funds. Future Fund, an Australian sovereign wealth fund, has pulled back during the regulatory fracas and is buying into renewable energy, like Tilt Renewables.
How Hedge Funds Invest Clients Money
So, with hedge funds performing so well, it’s interesting to know where they invest their client’s money. Recent Goldman Sachs analysis of over 800 hedge funds and almost 600 mutual funds suggested nine stocks that both viewed favorably. The majority of these picks are growth stocks, like Adobe (ADBE), Liberty Broadband (LBRDK), Square (SQ), and Twilio (TWLO). However, two very familiar faces also made their list: General Motors (GM) and Wells Fargo (WFC).
David Harding, who established Winton Capital Management in 1992, also laid out some of his funds’ recommended stock recently. Harding recommended Warren Buffett’s Berkshire Hathaway Inc. (BRK-B) as his number one pick; however, you can read his top ten here.
Interestingly, Berkshire Hathaway is huge on Apple (AAPL), with a stake of more than $130 million.
Tech stocks still feature among the most significant holdings in hedge funds that are looking for reliability and liquidity. Apple, Amazon (AMZN), Bank of America (BAC), and Visa (V) are some of the big players that are still popular with hedge funds.
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Alpesh Patel OBE