Hedge funds aren't betting on a recession, Goldman data show

They are overweight cyclical sectors

Hedge fund investors don't buy the idea that the U.S. economy is headed for a recession in the near term, according to data from Goldman Sachs.

The bank studied the holdings of 835 hedge funds with $2.1 trillion of gross equity positions at the start of July, and found that overall these funds are overweight cyclical sectors, favoring stocks in Information technology, consumer discretionary, industrial and materials sectors relative to the Russell 3000 index, according to a research report published Tuesday evening.

Cyclical stocks are those that tend to do well when the economy is growing quickly, while defensive stocks are those that outperform during economic slowdowns or during times of heightened market volatility.

Meanwhile hedge fund managers were underweight stocks in sectors typically seen as defensive , like real estate, consumer staples and utilities. They were, however, overweight the health care sector, also seen as defensive, as they took advantage of the market's fears of Medicare-for-all and other legislation being debated in the Democratic presidential primary contest, according to Ben Snider, equity strategist at Goldman.

Other indicators of hedge fund optimism include rising leverage. "Hedge fund leverage remained constrained in most of the first half of 2019," Snider wrote, "but funds lifted exposures sharply in late June and July as the Fed began to cut interest rates and headlines indicated improving US-China trade relations."

While funds have cut back on leverage since the beginning of July, as concerns over the yield curve and signs of rising trade policy tensions mounted, leverage remains elevated relative to the average level over the past five years.

Meanwhile, hedge fund portfolios continue to grow more concentrated in interest-rate sensitive, growth stocks like Amazon.com Inc. (AMZN) , Facebook Inc. (FB) , Microsoft Corp. (MSFT) and Google parent Alphabet Inc. (AMZN), indicating the belief that current momentum-driven bull market has more room to run.

But "the recent increase in hedge fund concentration and leverage make funds particularly vulnerable to a potential market unwind, particularly if accompanied by the decline in liquidity that typically coincides with falling risk appetite," Snider added.

Despite their faith in market-leading names, hedge funds have still underperformed the S&P his year, up 9% year-to- date, versus the broad index's more than 16% rise.

-Chris Matthews; 415-439-6400; AskNewswires@dowjones.com


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  08-21-19 1259ET
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