How Goldman's Hedge Fund Picks Beat The Market

The stock market in 2018 has seen an extraordinary level of turmoil not seen in years, enabling the $3.2 trillion hedge fund industry to beat the S&P 500 for the first time since the 2008 financial crisis, according to industry tracker HFR. So it's no surprise that Goldman Sachs' Hedge Fund VIP portfolio is also doing well. The basket of 50 stocks mirrors hedge funds' favorite holdings. It boasts a return of about 4%, double the pace of the S&P 500 year-to-date (YTD) through Friday's close. The market leadership of the portfolio, made up of growth stocks, may continue. "We expect growth stocks will continue to outperform this year, which should benefit our hedge fund VIP," says Goldman. (See also: Hedge Funds Beat Equities for 1st Time in a Decade.)

Hedge Fund VIP Basket to Return 16% in 12 Months

The investment bank's portfolio of hedge fund picks draws from 848 hedge funds with $2.3 trillion in gross equity positions, and includes Inc. (AMZN), Microsoft Corp. (MSFT), Alibaba Group Holdings (BABA), Visa Inc. (V), and Monsanto Co. (MON), as well as lesser known names such as Autodesk Inc. (ADSK), Booking Holdings (BKNG), XPO Logistics Inc. (XPO), and TransDigm Group (TDG).  In its report, Goldman points out that the hedge fund basket has "been resilient" during a volatile period when the S&P 500 index has moved 1% or more 34 times since the start of the year, the most during the first five months of any year since 2010. Like hedge funds, Goldman's portfolio also has boosted ownership of stocks in the surging energy sector.

Among the star performers, Amazon has posted a return of 39% thus far this year, Microsoft 17 percent, and Alibaba 15 percent.

9 Favorite Hedge Fund Picks

Company Total Return YTD
Amazon 39%
Microsoft 17%
Alibaba 15%
Visa 15%
Monsanto 10%
Autodesk 23%
Booking Holdings 21%
XPO Logistics 15%
TransDigm Group 22%

Source: Goldman Sachs; As of 6/1

Goldman estimates that earnings and revenue for its 50-stock portfolio will rise faster than the average S&P 500 company. This will enable the basket to return a median of 16% over the next 12 months compared to 11% for the S&P 500, according to Goldman.

Hedge Fund Portfolio's Exposure to Growth Stocks to Drive Gains in 2018

Several factors have enabled these picks, which were the most frequent among the top 10 holdings of hedge funds, to outperform the broader market. "Aside from factor exposures, performance of fund favorites suggests that managers have held on to their favorite positions and remain confident in the bull market," stated Goldman. 

As mentioned earlier, the hedge fund VIP basket also benefited from "extraordinary returns" in growth stocks versus the rest of the market over the past 18 months, as the group is "most positively correlated with growth stocks," David Kostin, chief U.S. equity strategist at Goldman, told CNBC. Goldman says these kinds of stocks will do well amid "healthy but modest" economic growth of 2.9% in the U.S. in 2018 and 2.2% in 2019.  

To be sure, not all of the 50 stock picks in Goldman's portfolio have been winners. Eighteen have posted negative returns year to date.(See also: Ray Dalio: Sell Expensive Stocks, Party Like Crazy.)

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