Goldman Data Show Hedge Funds Could Really Go for Orange Julius

Aug 22, 2014 4:07 pm ET

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Aug. 22 (Bloomberg) -- Hedge-fund managers, it turns out, are really like a bunch of grown-up mall rats.

That’s the conclusion one could draw from Goldman Sachs Group Inc.’s report on trends in the alternative-investment industry. Managers continue to allocate about 20 percent of assets to shares in companies dependent on discretionary consumer spending. In the Standard & Poor’s 500 Index, their weighting is only 12 percent.

That group of 85 stocks, from Walt Disney Co. to Nike Inc. and Yum! Brands Inc., was up 2.4 percent this year compared with an almost 8 percent gain in the S&P 500 as of yesterday. As a result, many hedge-fund managers, like teenagers who spent too much time in the mall, are bringing home some lousy report cards. The industry has returned 1 percent so far this year, according to Goldman’s Aug. 20 report.

“Consistent large allocations to retail and media stocks in the consumer discretionary sector have been headwinds to returns,” Goldman strategists including Ben Snider and David Kostin wrote.

The smaller dispersion of returns within the group isn’t helping matters, Goldman notes. There was a 94 percentage point gap between the S&P 500’s best performing consumer-discretionary stock this year (Under Armour Inc.) and the worst (Coach Inc.) as of today’s open. That sounds like a lot, but not really when you compare it with the 217 percentage points that separated the top winner from the loser at this time of year in 2013.

First, Worst

Still the current dispersion, second only to energy shares among the 10 main S&P 500 groups, makes it easy to see why this is a tough group to quit. And, obviously, not everyone’s a bull, especially after government data showed consumer spending stalled in July.

Another report from research firm Markit this week showed demand to borrow shares of retailers in the S&P 500 has climbed to a one-year high. As the back-to-school season kicks into full gear, Abercrombie & Fitch Co., Kohl’s Corp. and Five Below Inc. are among retail stocks showing increases in short interest, according to Markit.

Goldman serves as sort of a Jane Goodall to hedge-fund managers, journeying deep into the Excel jungles to learn more about these exotic creatures and report back to us on their mysterious ways. The additions and deletions to their indexes of most-important longs and shorts shows where the action has been in the consumer space.

Longs, Shorts

Dollar General Corp. and DirecTV were added to their basket of very-important longs, while News Corp. and Constellation Brands Inc. were dropped. In the very important short basket, Keurig Green Mountain Inc. and Home Depot Inc. were added, while DirecTV, Kohl’s and McDonald’s Corp. were dropped.

Perusing the full list, it’s clear that hedge-fund managers are scattered out across the entire mall, rather than clustered at a few stores.

Anyway, one theory for their 20 percent weighting in consumer discretionary could be that hedge fund managers are wisely getting in front of a pickup in spending and subsequent rally in the shares. Another theory could be that one is not in the best position to gauge retail traffic trends if they’re able to take a helicopter to the mall.

--With assistance from Kelly Bit and Pierre Paulden in New York.