Macro

Hedge Funds Boost Financial, Tech Stocks in Q1: Top Picks Include DXC, TPG

Hedge funds shift to financials and tech, increasing positions in AI infrastructure stocks and reducing megacap tech exposure.

By Alex P. Chase

5/23, 10:34 EDT
S&P 500
iShares 20+ Year Treasury Bond ETF
iShares 7-10 Year Treasury Bond ETF
Apple Inc.
The AES Corporation
Alaska Air Group, Inc.
Amazon.com, Inc.
Bath & Body Works, Inc.
DXC Technology Company
First American Corporation
Freeport-McMoRan, Inc.
Alphabet Inc.
Littelfuse, Inc.
Meta Platforms, Inc.
Marvell Technology, Inc.
Microsoft Corporation
NVIDIA Corporation
TD SYNNEX Corporation
Universal Health Services, Inc.
Walgreens Boots Alliance, Inc.
article-main-img

Key Takeaway

  • Hedge funds increased exposure to financial and tech stocks, notably DXC Technology (+7.1%) and TPG (+2.3%), while reducing health care allocations.
  • Universal Health Services saw a 2.7% ownership increase, with shares up 17% YTD; UBS upgraded it to buy.
  • Bath & Body Works and Alaska Air Group also saw significant hedge fund interest, with ownership increases of 2.5% and 1.5%, respectively, reflecting positive analyst upgrades and stock performance in 2024.

Hedge Funds Shift to Financials and Tech

In the latest quarter, hedge funds have notably increased their exposure to financial and technology sectors, according to a recent Morgan Stanley report. The analysis, based on the latest 13F filings with the Securities and Exchange Commission, reveals a strategic pivot away from health care stocks. Despite this shift, hedge funds remain most overweight in health care, consumer discretionary, and industrials sectors.

Morgan Stanley strategist Todd Castagno emphasized the importance of understanding these trends for investors. "Crowded trades come with the risk of overvaluation and increased volatility as it may be more difficult to attract the marginal investor, while avoiding overcrowded stocks can provide investors with an opportunity to capture unrecognized value when paired with strong fundamentals," Castagno noted.

Among the stocks with the largest ownership increases were Universal Health Services (UHS) in health care, Bath & Body Works (BBW) in consumer discretionary, and Alaska Air Group (ALK) in industrials. Universal Health Services saw a 2.7% increase in ownership, with its stock gaining over 17% this year. UBS recently upgraded UHS to a buy rating, expecting a return to its long-term trend of 3-4% volume growth. Bath & Body Works experienced a 2.5% increase in ownership, with JPMorgan upgrading the stock to neutral, citing stabilizing revenue growth. Alaska Air Group saw a 1.5% increase, with Wolfe Research upgrading it to outperform due to emerging tailwinds on the West Coast and favorable EPS upside.

AI Infrastructure Attracts Hedge Funds

Hedge funds have also been strategically adding exposure to lesser-known beneficiaries of the artificial intelligence (AI) boom, while reducing their positions in megacap tech stocks. Goldman Sachs' analysis of 707 hedge funds with $2.7 trillion in gross equity positions revealed a significant shift towards AI infrastructure stocks.

Ben Snider, Goldman Sachs' equity strategist, highlighted the growing interest in AI infrastructure investments. "Among the various phases of the AI trade, firms exposed to AI infrastructure investment have recently performed best and captured the most interest in our client conversations," Snider stated.

Key stocks that saw increased hedge fund ownership include Marvell Technology, TD Synnex, AES Corp., and Littelfuse. These companies are involved in various aspects of AI infrastructure, from chipmaking to technology supply-chain services. Additionally, Walgreens Boots Alliance and First American Financial were noted for their enhanced productivity through AI, while Freeport-McMoRan and Nextracker gained popularity for their roles in AI's power production.

Megacap Tech Stocks See Reduced Exposure

Despite the overall enthusiasm for AI, hedge funds have trimmed their positions in several megacap tech stocks. Goldman Sachs reported that funds reduced their net positions in Nvidia, Alphabet, Amazon, Microsoft, and Meta Platforms in the first quarter. However, Apple was an exception, with hedge funds increasing their exposure to the iPhone maker.

The reduction in megacap tech holdings comes after a strong rally in these stocks, driven by the AI frenzy. Nvidia, in particular, has seen its shares soar by over 90% this year, following a 240% increase in 2023. Hedge funds are now looking for opportunities in other sectors that will benefit from AI, such as infrastructure and productivity-enhancing companies.

Street Views

  • Todd Castagno, Morgan Stanley (Neutral on crowded trades):

    "Crowded trades come with the risk of overvaluation and increased volatility as it may be more difficult to attract the marginal investor, while avoiding overcrowded stocks can provide investors with an opportunity to capture unrecognized value when paired with strong fundamentals."

  • A.J. Rice, UBS (Bullish on Universal Health Services):

    "We expect UHS to return to its longer term trend of 3-4% volume growth in the segment. Pricing should also remain strong, which will make up for any bumps in the road on the volume side."

  • Wolfe Research Analyst for Alaska Air Group (Bullish on Alaska Air Group):

    "ALK is facing several emerging tailwinds on the West Coast with an accelerating corporate recovery, improving competitive capacity and lower regional jet fuel prices. As a result, we see a favorable combination of EPS upside and an attractive valuation."