Hedge Funds Love This Sector

No it is not, consumer discretionary or technology, frequent stomping grounds for hedge funds. It is not the healthcare sector, another hedge fund favorite, either. Data indicate that in the first quarter, hedge funds, an investment vehicle often viewed as exotic, even sexy, were drawn to boring utilities stocks.

“According Pavle Sabic, S&P Global Market Intelligence’s Head of Market Development for Corporates and the author of the hedge-fund tracker research according to S&P Global Market Intelligence’s Hedge Fund Tracker research, the utilities sector was the only one to receive net buys, $164 million, during the first quarter of 2016. The other nine GICS sectors experienced net sells, led by consumer discretionary and information technology, with $4.6 billion and $3.2 billion, respectively,” said S&P Capital IQ in a note out Wednesday. 

Up 11 percent year-to-date, the Utilities Select Sector SPDR XLU is the best performer among the sector SPDR exchange traded funds and the race is not even close. XLU's rivals, the Vanguard Utilities ETF VPU and the Fidelity MSCI Utilities Index ETF FUTY are also up more than 11 percent this year.

Historical data confirms that utilities stocks are the most negatively correlated to rising U.S. interest rates, and as such, they typically lag during rising rates environments. Last year, utilities finished as the third-worst performing sector in the S&P 500. So it is not surprising that XLU and rival utilities slumped Wednesday when minutes from the most recent Federal Reserve meeting revealed the possibility of a June interest rate hike.

If investors react hastily to another rate hike, that would like knock some of the wind out utilities ETFs' sails because data indicate professional money, including hedge funds, has been pouring into utilities ETFs this year. For example, XLU is one of this year's top asset gathering sector ETFs with new assets added of $1.37 billion. The rival VPU has added over $426 million in new capital. 

Although utilities were widely embraced by hedge funds in the first quarter, the sector still does not represent a significant portions of many ETFs that embrace hedge fund strategies.

For example, the Global X Guru Index ETF GURU, which holds 49 stocks that frequently appear in 13F filings, features a weight of just over two percent to utilities, its smallest sector allocation.

GURU “is comprised of the top US listed equity positions reported on Form 13F by a select group of hedge funds that the index provider Solactive deems as having moderate turnover rates and concentrated holdings,” said S&P Capital IQ.

The $93.4 million GURU is down 6.6 percent this year.