Hedge funds are in a ‘vicious downward cycle’ as their favorite stocks trail

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Information about Facebook stock shares is displayed on a monitor as traders and financial professionals work on the floor of the New York Stock Exchange (NYSE) at the closing bell, November 19, 2018 in New York City. 

Drew Angerer | Getty Images

Information about Facebook stock shares is displayed on a monitor as traders and financial professionals work on the floor of the New York Stock Exchange (NYSE) at the closing bell, November 19, 2018 in New York City. 

A collection of hedge funds’ favorite stock picks — including Facebook, Alibaba and Amazon — are underperforming the broader equity market badly in the second half of 2018.

After beating the market in the first half of the year, a basket of the most popular long positions at 823 hedge funds has lagged the S&P 500 by 7 percentage points since mid-June, according to Goldman Sachs. The Goldman Sachs Hedge Fund VIP basket is down about 9 percent since June.

“Hedge fund returns, portfolio leverage, and the performance of popular stocks have entered a vicious downward cycle,” wrote Goldman’s David Kostin.

The average equity hedge fund is down 4 percent this year, according to Goldman. Funds saw their worst monthly performance in three years in October, down 2.35 percent on average, according to financial data company Preqin.

Among the top names at hedge funds as of the end of the third quarter were the popular ‘FAANG’ stocks, with Facebook and Amazon representing two of the top three largest positions, according to Goldman. Facebook, Amazon, Apple, Netflix and Alphabet have fallen sharply in recent weeks, with the group wiping out about $1 trillion in market value from their 52-week highs through Tuesday’s close.

The Technology Select Sector SPDR ETF is down more than 13 percent since the start of the quarter.

The sell-off in technology has accompanied a wider pullback in the stock market. The S&P 500 is down about 8.5 percent since the start of October, while the Dow Jones Industrial Average fell 6.8 percent.



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