In early January we highlighted how the performance of stocks most widely held by hedge funds provided an example of the de-leveraging process evident in the financial markets. The reasoning was that since hedge funds typically use some degree of leverage in their investment process, as banks and brokers shrunk their balance sheets, the amount of funds available to hedge funds would shrink, causing them to unwind some of their positions. Given these circumstances, it was no surprise that the stocks most widely held by hedge funds were underperforming the S&P 500 by a wide margin.
This morning the WSJ highlighted that the process of de-leveraging was picking up speed. While there has recently been a pick up in news flow regarding hedge funds failing to meet margin calls, it is interesting to note that even though the S&P 500 is back down near the lows of January (on a closing basis), our index of stocks most widely held by hedge funds has actually been outperforming the S&P 500.
Click here to subscribe to Bespoke Premium today.