LONDON (Reuters) - Tech stocks remain the largest net sector exposure for equity hedge funds, which are set to deliver their strongest returns since 2013, Goldman Sachs (NYSE:GS) said on Wednesday in a note on the industry's most and least favored areas of the market.
Information technology accounts for 27 percent of hedge fund portfolios, GS says. Financial are the largest underweight -- and the biggest area of divergence with large-cap mutual funds, which like the sector.
Equity hedge funds have returned 10 percent year to date as stock-picking has gone particularly well. The most popular hedge fund long positions have outperformed both the broad market and the largest shorts, GS said.
The U.S. bank's 'Hedge Fund VIP' basket of most popular stocks has outperformed the S&P 500, up 25 percent compared with 17 percent for the index.
Aside from the global tech stock boom, hedge funds have also benefited from tilting towards parts of the market they do not typically favor, such as large-caps, momentum and growth stocks, which have outperformed this year, while avoiding value and small-caps, which they have historically preferred.
"Tilts toward outperforming momentum and growth stocks have helped lift the most popular long positions for most of 2017, but have weighed on returns during the past month as those factors dipped," wrote Goldman analysts.
Momentum stocks have been the strongest-performing this year, returning 15 percent, GS data showed, while value stocks have been the weakest.
Hedge funds' crowding in the most popular positions rose slightly in the third quarter, they found, though it remains below the extremes reached in 2016.
This top-heavy tilt - with the average hedge fund holding 68 percent of its long portfolio in the top 10 positions - reflects a heightened concentration of the broader market, where the largest companies account for a growing share of total index market cap.
Turnover in hedge fund holdings has also hit historical lows this quarter, declining in all sectors but healthcare. As hedge fund managers' conviction on the tech sector crystallized, turnover in IT stocks hit its lowest level on record.
Among the 50 stocks that most frequently appear in hedgies' top 10 holdings, the usual suspects of U.S. tech Amazon (NASDAQ:AMZN), Facebook (NASDAQ:FB), Alphabet (NASDAQ:GOOGL), Apple (NASDAQ:AAPL) and Microsoft (NASDAQ:MSFT) rub shoulders with Chinese internet giant Alibaba (NYSE:BABA), while Bank of America (NYSE:BAC) and Citigroup (NYSE:C) also feature.