1. The typical hedge fund operates 46% net long versus 36% in 3Q 2011. Aggregate net exposure equals $332 billion. We estimate 17% of short positioning is conducted via ETFs with 13% occurring at the index level.
2. Combining long and short position data, hedge funds have the greatest net portfolio exposure to Information Technology (21%), Consumer Discretionary (20%), and Energy (14%). Hedge funds are not benchmarked but relative to the Russell 3000 universe they are 800 bp overweight Consumer Discretionary (20% vs. 12%) and 750 bp underweight Consumer Staples (3.5% vs. 11.0%). Net exposure rose in every sector in 4Q.
3. Turnover of all hedge fund holdings averaged just 28% during 4Q 2011, an all time low. The top quartile of positions (largest holdings) turned over just 14% while the bottom-quartile (smallest positions) turned over 41%. Since 2001, quarterly turnover of fund positions averaged 35%, peaking in 4Q 2008 at 45% but falling steadily since. Turnover fell in 4Q in all sectors.
4. Hedge fund returns are highly dependent on the performance of a few key stocks. The typical hedge fund has an average of 64% of its long equity assets invested in its 10 largest positions compared with 34% for the typical large-cap mutual fund, 18% for a small-cap mutual fund, 20% for the S&P 500 and just 2% for the Russell 2000 index.
5. Apple (AAPL) matters. One out of five long/short hedge funds has AAPL among its ten largest long positions and approximately 30% of hedge funds own at least one share of AAPL. When it ranks among the top ten holdings, AAPL represents an average of 8% of single-stock long equity exposure. In aggregate, hedge funds own only 4% of AAPL equity cap. The average hedge fund AAPL position equals 1.6%, given 70% of funds own no AAPL.
6. Five stocks have been in our VIP basket since inception in 2007 (18 quarters). AAPL, GOOG, MSFT, QCOM, and CVS have ranked among fundamentally-driven hedge funds’ top 10 holdings for more than 5 years. AAPL (+195%), QCOM (63%) and CVS (12%) outperformed the S&P 500 return of 4% during the same period. MSFT (-4%) and GOOG (-8%) lagged.
7. Turnover for the VIP basket in 4Q 2011 was below the historical average. 12 new constituents entered the VIP basket in 4Q 2011 compared with an average quarterly turnover of 17 stocks since 2001. New constituents include the following: BAC, DLPH, ESRX, HAL, HPQ, LMCA, MCD, PXD, PCLN, STX, TYC, and VIAB. The following stocks are no longer in the basket: AMT, ABX, CHK, CMCSA, CCI, EMC, EXPE, HES, M, ORCL, PG, and WLP. Exhibit 50 on page 17 contains a list of all 50 current constituents in our VIP basket.