Mutual fund performance has declined over the year, while hedge funds have continued to perform well, Goldman Sachs revealed in a recent report.
Specifically, 34% of large-cap mutual funds have outperformed their benchmarks year-to-date, marking a decrease from 50% in May and below the historical average of 38%.
Among different styles, large-cap value funds have been the strongest performers this year, with 45% of managers beating the Russell 1000 Value index. On the other hand, large-cap core funds have struggled the most, with only 25% surpassing the S&P 500.
According to estimates from Goldman Sachs Prime Services, US equity fundamental long/short hedge funds have posted returns of +9% year-to-date, driven by successful bets on favored long positions and targeted short positions.
Meanwhile, both mutual funds and hedge funds have kept their long exposure to US equities.
Goldman notes that mutual fund cash balances have dropped to a record low of 1.4% of total assets, as funds aim to reduce the impact of holding cash in a rising stock market.
At the same time, hedge fund gross and net exposures decreased slightly during recent market declines, but both remain above their 5-year averages. Net leverage stands at 72%, placing it in the 53rd percentile since 2019, while gross leverage remains high at 299%, ranking in the 97th percentile.
Interestingly, both hedge funds and mutual funds reduced their exposure to mega-cap tech stocks by the start of the third quarter, a move that paid off as these stocks struggled during the summer.
For the first time since 2022, the weight of the "Magnificent 7" in hedge fund long portfolios decreased. Similarly, mutual funds increased their underweight position in the group, moving from 660 basis points in the first quarter to 671 basis points in the second quarter.
Both hedge funds and mutual funds reduced their positions in Microsoft (NASDAQ:MSFT), Nvidia, Alphabet (NASDAQ:GOOGL), Meta, and Tesla. However, both groups increased their holdings in Apple (NASDAQ:AAPL), "taking advantage of its underperformance in the first part of the year to add exposure at a more attractive valuation,” Goldman’s note states.
Unlike mutual funds, hedge funds reduced their exposure to cyclical stocks during the second quarter, a move that helped them perform better during recent market volatility, while both identified opportunities in small-cap stocks.
Sector-wise, while hedge funds diversified their exposure in the second quarter, mutual funds largely maintained their existing sector allocations. Still, both groups increased their investments in the Health Care sector, seeking defensiveness and non-AI growth potential, though this sector could face risks from policy uncertainty.