These Were the Most Important Short Positions Among Hedge Funds in Q3

When hedge funds disclose their holdings every quarter on their 13Fs, there are many different ways to analyze the data. One angle that doesn't get a lot of attention involves looking at the most popular shorts.

The most important hedge fund shorts

In its quarterly "Hedge Fund Trend Monitor," Goldman Sachs includes a list of what it calls the "Very Important Short Positions" for hedge funds. A review of the third-quarter list only adds to the explanation of why so many hedge funds have been generating negative or lackluster returns.

While the vast majority of Goldman's "Very Important [Long] Positions have generated deeply negative returns, a larger share of the most popular shorts are in the green — and some significantly so. In fact, the top four most popular shorts are all up year to date, three of those significantly.

Goldman explained that the Very Important Short Position list is designed to be a short hedge for its basket of the most popular long positions. The list of hedge fund shorts is an equal-weighted basket made up of 50 S&P 500 stocks with the highest total dollar value of outstanding short interest.

The Very Important Short list excludes stocks that were in the VIP basket of long positions and stocks with over 10% of float-adjusted shares held short, which allows for sufficient liquidity. Goldman emphasized that its list of the most popular hedge fund shorts is not based on 13F filings and does not consist of the stocks with the highest percentage of short interest.

Analysis of the top 10 hedge fund shorts

The number one "Very Important Short Position" is Exxon Mobil, which has returned 92% year to date. While only 1% of the oil giant's float cap is sold short, the total value of those shorts is $5 billion.

IBM is in second place, gaining 14% year to date, while 3% of its float cap is sold short for a total value of $4 billion.

Three of the top 10 shorts are oil and gas companies (Exxon Mobil, Chevron and Occidental Petroleum), while two are banks (Bank of America and JPMorgan Chase). Also in the top 10 are chipmaker Texas Instruments, biotech Amgen, cable and satellite service provider Charter Communications, and pharmaceuticals giant Pfizer.

Four of the top 10 were up by 30% or more, with Chevron gaining 62% and Amgen up 30%. Only one of the top 10 was down significantly, which was Charter, with a decline of 40%. Three others were down by 16% or less.

Occidental Petroleum gained 150% in Q3

What's truly remarkable is that Occidental Petroleum is in third place—despite its incredible 150% year-to-date return. According to Goldman Sachs, 7% of the company's flat cap is sold short for a total value of $3.8 billion.

The firm reported that five hedge funds had Occidental as one of their top 10 holdings in the third quarter. A review of the 13F filings from some of the most-followed hedge fund managers reveals that David Tepper's Appaloosa Management, John Paulson and George Soros actually dumped their stakes in Occidental Petroleum.

It's unclear at what point they exited the position, but they may have sought to lock in some of those sizable paper gains. Of course, there is always a danger of exiting an investment too early and leaving a significant chunk of additional gains on the table.

Warren Buffett remained bullish on Occidental Petroleum throughout the third quarter, increasing Berkshire Hathaway's stake as the stock rose substantially.

Stocks with the largest positive changes in popularity

Goldman Sachs also looked at the stocks with the largest changes in popularity. On the positive side, healthcare became more popular. UnitedHealth Group, Signify Health, Edwards Lifesciences, 1Life Healthcare, and Alignment Healthcare all landing in the top 10, with more than 20 hedge funds adding them to their portfolios.

Other stocks of note that gained in popularity among hedge funds included PayPal, Pinterest, Bill.com, Lululemon Athletica, and Domino's Pizza. The stock with the highest percentage of short interest on the list was Signify Health, at 9%.

The average stock on the list was added by 21 hedge funds, while the median number of additions was 19. After all those additions, some stocks had significant ownership among hedge funds. For example, hedge funds owned 23% of BTRS Holdings' equity cap at the end of September, while they held 19% of Ultragenyx Pharmaceutical.

Hedge funds also held 17% of primary care provider 1Life Healthcare, probably due to Amazon's pending acquisition of the company, and 13% of Domino's Pizza's equity cap.

Based on the returns of the stocks with the largest positive changes in hedge fund popularity since the end of June, the third quarter brought much-needed relief to fund managers. Between June 30 and September 30, the average return of the stocks with the largest positive changes in hedge fund popularity was 25%, while the median return was 18%.

Of note, 1Life Healthcare was up 114%, and Signify Health gained 106%. Atlas Corp. gained 46%, Alnylam Pharmaceuticals returned 47%, and Pinterest returned 45%. On the other hand, Ultragenyx Pharmaceutical was off by 41%, while Edward Lifesciences lost 20%, and TransUnion declined 18%.

Stocks with the largest negative changes in popularity

On the other hand, the stock with the largest negative change in hedge fund popularity was Stryker Corporation, which lost 26 hedge funds despite its 12% return during the third quarter.

Other stocks of note on this list included Avaya Holdings, which declined 27% during the quarter and had 21% short interest. At the end of September, 10 hedge funds still held Avaya in their top 10 holdings.

Additionally, Faraday Future Intelligent Electric plunged 80% during the quarter, and 19% of its float was sold short. Crown Holdings, ConocoPhillips, Warner Bros. Discovery, Zendesk and Wells Fargo were also on the list. The average stock on this list returned 8% during the third quarter, while the median return was 11%.

Some stocks with noteworthy gains despite their sizable decreases in popularity included: SLB (+54%), ConocoPhillips (+53%), Saia (+39%), PDC Energy (+31%), and Merit Medical Systems (+29%). Despite their sizable decreases in hedge fund popularity, 21 hedge funds still held Zendesk among their top 10 holdings at the end of the quarter, while nine still held Crown Holdings in their top 10.