Today we present you with Bank of America Merrill Lynch's quarterly report on hedge fund holdings. In this report (released four times a year), they examine the hedge fund landscape via public disclosures to identify which stocks hedgies are really wagering on. In essence, this research is very similar to Goldman Sachs' VIP list of the securities most important to hedge funds. While our hedge fund portfolio tracking examines portfolios of specific managers, BofA has profiled the broader hedge fund universe.
We'll first start with arguably the most desirable information: their 'Hedge Fund Generals index'. This is a list of top hedge fund holdings, but with a unique twist. The HF Generals is:
an equal-weighted basket of 20 stocks that is a combination of the most concentrated and most popular stocks among HFs. To construct the HF Generals basket we took those stocks in each quarter that ranked in the top quartile of both the most widely held stocks (popular) and those with the heaviest HF ownership (concentration), sorted by concentration.
The performance of this strategy is notable as well. For 2009, this basket of stocks massively outperformed the S&P 500 (NYSEARCA:SPY) by 46%. Year-to-date for 2010, it's up 4.1% versus 0.3% for the S&P 500. BofA notes that, "this strategy has outperformed the S&P 500 index by 89bp per month/260bp per quarter between September 2003 and February 2010." Those of you with Bloomberg Terminal access can pull this up via MLDIHFGN index. Remember that the list below is equal weighted:
The Hedge Fund Generals Index
1. Take-Two Interactive (NASDAQ:TTWO)
2. Equinix (NASDAQ:EQIX)
3. Terra Industries (TRA)
4. Wendy's Arby's Group (NASDAQ:WEN)
5. E*Trade Financial (NASDAQ:ETFC)
6. Black & Decker (BDK)
7. JDA Software (NASDAQ:JDAS)
8. Pactiv (PTV)
9. ITT Educational (NYSE:ESI)
10. VeriSign (NASDAQ:VRSN)
11. First American Corp (NYSE:FAF)
12. Mead Johnson Nutrition (NYSE:MJN)
13. Palm (PALM)
14. Hologic (NASDAQ:HOLX)
15. American Eagle Outfitters (NYSE:AEO)
16. Carter's (NYSE:CRI)
17. CommScope (CTV)
18. Teradata (NYSE:TDC)
19. OfficeMax (NYSE:OMX)
20. SLM Corp (NASDAQ:SLM)
As you can see, this list is quite different from the most popular stocks amongst hedge funds. The 'most popular' list we detailed last week includes more mega cap, mainstream stocks. The Hedge Fund Generals list, on the other hand, contains a lot of special situation and edgy stocks that hedge funds are betting will soon see catalysts.
The HF Generals list does include a few intriguing stocks that we've focused on in the past. Just recently, we touched on why hedgies like Mead Johnson Nutrition. Also, various long/short equity funds that we track have been moving in and out of Teradata for a few quarters now. Carl Icahn has been busy with his activist stake in Take-Two Interactive as he hopes to generate shareholder value. Chris Shumway's hedge fund Shumway Capital Partners has a large stake in Equinix. Additionally, it was very interesting to see Palm on this list given that many hedge funds have been short the name and shares have been in a proverbial deathspiral. And lastly, we note that a few of the hedgies we specifically track have previously held positions in Wendy's Arby's Group (WEN). However, of the funds MarketFolly focuses on, many have reduced their stakes and/or sold out of WEN in recent quarters.
Overall, while hedge funds saw some rotation in the fourth quarter, IT and Healthcare were the most favored sectors while telecom was the least favored. Additionally, BofA wagers that hedgies are still bearish on REITs and that hedge fund cash levels have returned to pre-crisis levels as well. Embedded below you will find Bank of America Merrill Lynch's entire quarterly hedge fund report.
Disclosure: No positions