Are Hedge Funds Diversifying Away from Tech Giants Amid Market Volatility?

Hedge Funds Reduce Stakes in Tech Giants Despite +8% YTD Returns, Shifting Focus to Cyclical Industries

By Alex P. Chase

2/21, 05:37 EST

Key Takeaway

  • Hedge funds are reducing stakes in the "Magnificent Seven" tech giants, including Alphabet and Apple, despite an 8% YTD return.
  • A shift towards cyclical industries like General Electric indicates a diversification strategy away from tech-heavy portfolios.
  • Concerns over "violent unwind" due to crowding and momentum in tech investments highlight market volatility risks.

Hedge Funds Shift

Hedge funds have been reducing their exposure to the Magnificent Seven tech giants, despite the strong gains these companies have provided in 2024. Analysis from Goldman Sachs reveals that these popular mega-cap tech firms, including Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia, and Tesla, have been a significant part of hedge funds' portfolios, comprising 13% of their aggregate long positions. While these tech giants have delivered returns of +8% year-to-date, outperforming the S&P 500, hedge funds have started to trim their stakes in these companies.

"Goldman Sachs noted that the returns generated by the Magnificent Seven have been boosted by the high levels of crowding and a record tilt toward momentum," highlighting the risks associated with this strategy. The report warns of a potential "violent unwind" if market conditions change, as witnessed in late 2023.

Performance and Popularity

The strong performance of the Magnificent Seven has led to a +9% return for Goldman Sachs' Hedge Fund VIP list, which tracks the most popular stocks among hedge funds. However, this success has also led to concerns about the level of crowding and momentum driving these gains. Microsoft, once a favorite among hedge funds, has now been relegated to the "Falling Stars" list, indicating a significant drop in popularity.

"Amazon.com was the only Magnificent Seven company that continued to be added to hedge funds portfolios," signaling a divergence in investment strategies among hedge funds. While tech giants have been the focus of hedge fund investments, there is a noticeable shift towards cyclical industries, such as General Electric and Union Pacific Corporation, as investors seek opportunities in the global manufacturing sector.

Market Outlook

The shift in hedge funds' investment strategies reflects a broader trend in the market, where investors are balancing exposure to tech giants with investments in cyclical industries. The performance of the Magnificent Seven, while impressive, is also raising concerns about the sustainability of these gains in the face of changing market conditions.

Street Views

  • Goldman Sachs Analyst for the Magnificent Seven tech giants (Neutral on the Magnificent Seven):

    "Top hedge funds have started cutting their exposure to the Magnificent Seven tech giants, despite having generated gains due to the bumper returns provided by the popular mega-cap tech companies in 2024 so far."

  • Goldman Sachs Analysis (Bullish on Amazon):

    "Amazon.com was the only Magnificent Seven company that continued to be added to hedge funds portfolios, in movements that saw it rise to first place on Goldman Sachs’ Hedge Fund VIP list."