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The Tell: Why once-hot hedge-fund stock picks are now the ‘pain trade’ of 2021


The reflation trade — a bet that assets that benefit from a post-pandemic surge in growth and inflation will outperform their traditionally safer peers — is putting the hurt on tech and other growth-oriented shares that have been popular with big hedge funds.

That finding comes from the latest look by RBC Capital Markets at a basket of stocks it dubs “hedge-fund hot dogs,” a roster of the most popular holdings among hedge funds based on their quarterly 13-F filings with the Securities and Exchange Commission. Funds must disclose long positions held at the end of each quarter within 45 days.

“Our primary list of the most popular stocks in hedge funds (Hot Dogs) has underperformed sharply in 2021, with relative performance trends in place [year to date] that echo the sizable underperformance seen in 2016,” wrote Lori Calvasina, head of U.S. equity strategy, in a Monday report. “This is largely due to the shift in
market leadership away from safer secular growers and back towards riskier value and cyclical recovery plays.”

RBC Capital Markets

As reflected in the left-hand chart above, the basket’s underperformance has been particularly sharp for the past several months. While the basket of hot dogs turned in a strong performance in 2020, its outperformance relative to the S&P 500

peaked last August, Calvasina said.

That is “a reminder that the pain trade in popular hedge-fund holdings has been under way for quite some time, essentially since the reflation trade took off in earnest,” she said.

Calvasina and company don’t expect the pressure on those names to let up as long as value leadership remains intact.

The table below shows the current basket of most popular holdings by dollar value owned.

RBC Capital Markets

Expectations for an acceleration in economic activity as the U.S. and the rest of the world begin to move beyond the COVID-19 pandemic have been credited for sparking a rotation away from the highflying, tech-oriented companies toward stocks more sensitive to the economic cycle.

That is translated into outperformance for value investments, seen as undervalued relative to a variety of price metrics, versus growth stocks, which are shares of companies expected to grow earnings and revenue more quickly than their peers. For the year to date, the Russell 1000 Value Index

is up 17.3% versus a 6.1% gain for the Russell 1000 Growth Index

Stocks were pushing to the upside on Monday, with the Dow Jones Industrial Average

up 240 points, or 0.7%, while the S&P 500

advanced 1.2% and the tech-heavy Nasdaq Composite

gained 1.7%.

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