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Crowding, Hedge Fund Overlap

FANG vs. FAANG: Analyzing the Industry’s Hottest Stocks

Stan Altshuller Chief Research Officer

FANG & FAANG stocks are all over the news right now, but are they popular with hedge funds? We'll explore in this article.

In 2015, only four stocks were responsible for a quarter of the market’s gains: Can you guess which four?

Commonly known as FANGs, these super-growth companies dwarfed their competition, and in recent years their stocks soared. They’ve lead mega-caps to outperform and masked much of the markets troubles with growth in all major indices. Facebook, Amazon, Netflix, and Google (FANG) are in so many hedge fund portfolios that investors are growing tired of hearing the same story from their managers. Many managers hold all or a combination of these stocks, which has raised concern over portfolio crowding. But are FANGs as crowded as investors fear? To analyze this, we crunched some numbers on the latest public holdings data from over 1,300 hedge fund managers.

There’s no doubt that FANG stocks are popular with managers. If you include Apple (FAANG), like some are, they’re even more so.

FAANG_Table

The table above shows ownership from our Hedge Fund Universe (roughly 1,300 managers that report portfolio holdings via 13F filings). While Facebook is the most popular, with 248 managers, or roughly 20% of hedge funds invested in the stock, the heaviest allocation as asset percentage is Apple.

Here’s the important thing to keep in mind: None of these stocks are crowded. Crowded stocks, by our definition, must have many managers invested (check), but they also need to be illiquid. Fore more information about crowded stocks, including a list of the twenty most crowded among hedge funds, see our latest report, The Novus 4C Indices.

Looking at Apple, for instance, only 4% of shares are owned by hedge funds; because these stocks are so liquid, managers rarely represent a large portion of monthly volume, even if they sell all at once. At the same time, managers take profits or scale back their positions in FAANGs without influencing price. In viewing the “Net” column above, it’s clear that most stocks—excluding FB—experienced net sells in Q1 of this year.

Let’s also glance at the column labeled “HFU Size.” This is the market value of all hedge fund longs in each stock over the total value of our Hedge Fund Universe. More simply, it’s the average position size of managers in each name. Thus, Apple is a 1.33% position in the HFU, while it’s a 4% position in the S&P 500! Amazon is a 60bps position for hedge funds and a 1.9% position in the S&P, and so on. If anything, hedge fund managers in aggregate are massively underweight FAANG, even when compared to other active managers. While one out of five hedge funds hold FB, it’s in one of every two mutual funds. And Apple? Seven of ten mutual funds hold it, compared to two of ten hedge funds.

In prior work, we noted that hedge funds associated with Tiger Management are great stock pickers and often predict future outperformance with their high-conviction stock picks. Their relatively low turn-over also makes them ideal candidates to study via 13Fs. How are the Tigers positioned with FAANG stocks these days?

FANG stocks and the novus 4Cs

We created a group of 50 Tiger Cubs (including Tiger Management, seeds, and grand-cubs) and visualized their aggregate portfolio in the above force-field diagram using 3/31/2017 data. While FANG is still central in their portfolios, Charter is more common to the Cubs (19 holders) than Netflix (9). Apple isn’t central to the network at all but rather on the periphery. While half of all Cubs hold Facebook, only five hold Apple. So not really FAANG, but FANG after all, at least when it comes to the Tiger Cubs.

While FANG stocks are some of the most popular in terms of news coverage, our Novus 4C Indices track the most important stocks in hedge funds specifically. Learn more about crowded, consensus, conviction, and concentrated names in our latest report.

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