Hedge Funds Would Be Doing Great If They Weren't Shorting Stocks

Even with the recent sell-off, the S&P 500 is up a respectable 15% since the beginning of the year.

The average equity hedge fund, however, is up by just 4.1% through August 9. This is according to a new report from Goldman Sachs equity strategy team.

Goldman’s Amanda Schneider, however, notes that the large long positions of hedge funds — as measured by Goldman’s Hedge Fund VIP basket — have actually done pretty well. It’s the short positions that have been subtracting from gains.

From Goldman’s Amanda Schneider:

The most important long positions have outperformed the S&P 500 by about 300 bp so far in 2013. Our Hedge Fund VIP basket returned 23% through August 9 compared with 20% for the S&P 500.

Unfortunately, many widely-held short positions continue to outperform, offsetting the strong performance of popular longs and hampering overall hedge fund returns. Our basket of S&P 500 stocks with the largest dollars of shorts has returned 20% YTD, in line with the S&P 500. In addition, the 50 stocks over $US1 billion market cap with the highest short interest as a percentage of market cap returned an average of 30%. Fully 12 of the 50 key short positions have returned more than three times the S&P 500 return. See page 33.

As you can see from this chart, hedge fund long positions are way out front. Mutual funds are lagging the S&P 500 by just a hair. And the average hedge fund is way behind.

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