Jefferies: Hedge funds levered up in July while sharply cutting tech

Where did capital flow after leverage increased?

After a sharp contraction in June, long exposure among the hedge funds tracked by Jefferies rose to 259% at the end of July, above the 172% level at the end of June and the long-term average of 192%, but still below 312% in May.
By Jefferies’ style groupings, the weight of cyclical stocks rose from 63.4% at the end of June to 75.5% at the end of July, about 22.8 percentage points above the S&P 500; the weight of long-term growth stocks fell to 30.1%, an underweight of about 8.6 percentage points. The firm classifies semiconductors as cyclical stocks, so this grouping differs from sector classifications.
Bond-proxy stocks shifted from a net long position of 2.3% at the end of June to a net short position of 5.3% at the end of July; the shorts were mainly in consumer staples.

The net weight of the information technology sector fell from 32.1% at the end of June to 20.3% at the end of July, below its long-term average of 27.7% and about 16.3 percentage points below the sector’s weight in the S&P 500.
The weight of the industrials sector rose by about 5 percentage points over the same period to 18.0%, a record in the firm’s dataset, and an overweight of about 9.3 percentage points versus the S&P 500. The weights of financials and consumer discretionary rose to 16.4% and 16.3%, respectively.
The reduction in tech exposure did not eliminate the tech concentration among popular stocks: after an update, more than half the stocks in the crowded basket tracked by Jefferies—which comprises stocks favored by both hedge funds and long-only funds—were still in the tech sector.

The combined net weight of the Sweet 16 stocks tracked by Jefferies fell from 39.1% at the end of June to 24.5% at the end of July. During the same period, these stocks had a weight of 39.4% in the S&P 500, leaving hedge funds significantly underweight.
Amazon was a notable exception: its net weight rose by 5.9 percentage points to 14.5%, making it the largest long holding; Apple shifted from a net long position of 2.0% to a net short position of 6.2%, becoming the largest short.
Nvidia’s net weight fell by 3.3 percentage points to 3.2%, while Alphabet’s fell by 3.2 percentage points to 2.6%; Broadcom and Tesla also shifted from net long to net short positions.

The net weight of Russell 2000 constituents in hedge fund portfolios rose from 4.5% at the end of June to 7.4% at the end of July, an overweight of 3.24 percentage points relative to their weight in the Russell 3000, which represents the overall U.S. stock market; the overweight in mid-cap growth stocks also rose to 19.6 percentage points.
Portfolio performance through the end of September was mixed: of the six portfolios tracked by Jefferies, only two outperformed the S&P 500’s 0.3% decline in September. The crowded basket rose 5.2%, while the basket of stocks that shifted from net long to net short fell 3.3%, bringing its year-to-date decline through the end of September to 11.7%.
The holdings and performance figures use different time windows: the sector and style weights above are as of the end of July; the high- and low-turnover baskets are based on updates to 13F filings at the end of June; and portfolio returns are measured through the end of September.