Hegde Funds Liquidating: Goldman HF VIP Basket Gets Crushed


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Two months ago, when we last looked at the 50 most popular long hedge fund positions as compiled by Goldman Sachs, which the bank calls its Hedge Fund VIP list, and which we have frequently dubbed the “Hedge fund Hotel California” for various obvious reasons, we offered the following observations:

What is notable about this basket, is that it tends to outperform the S&P in most periods, and did so by 170 bp YTD (3.5% vs. 1.9%) and in 64% of quarters since 2001. But this outperformance comes at a cost: if and when the selling begins, as it did in the spring of 2016 when Valeant imploded and blew up the “pharma trade”…

… the basket tends to get hit especially hard: quote Goldman, “although the basket has been a strong historical performer, it suffered its worst historical underperformance vs. the S&P 500 in late 2015 and 1H 2016 (-17% vs. -3%).” But good news followed, because thanks to another coordinated central bank intervention (the Shanghai Accord) the basket then rallied back to outperform the S&P 500 by 21 percentage points (+52% vs. +31%) between 2H 2016 and early 4Q 2017.”

Well, it appears that the latest cycle of outperformance is now over, because as the following sloping head-and-shoulders chart in the GS HF VIP index shows, the bottom is about to fall out for the 50 most popular hedge fund names, as suddenly instead of frontrunning purchases, hedge funds will scramble to liquidate first before everyone else. And not to make a too fine point of it, Bloomberg also adds that “today feels like a liquidation day from popular hedge fund holdings” – because the HF VIP index is tumbling by 1.8%, its biggest drop in months, and set for the lowest close since December, wiping out all 2018 gains. Needless to say, its correlation with the S&P is almost 100%.

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This means that the market’s most important leadership group is now on the verge of collapse, a group which includes in the Top 5 positions names like Amazon, Facebook, Time Warner, Alphabet and Microsoft. The full list of what to short is below.

Finally for those who believe the market is indeed facing a major hedge fund liquidation event, a convenient pair trade would be to go short the entire VIP basket, while at the same time buying the 50 most shorted names as funds, facing an avalanche collateral-driven margin calls, are stopped out on their favorite shorts. The 50 most shorted names are shown below.

 

 


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