Is The Hedge Fund Love Affair With Tech Stocks Over? Goldman Sachs Data Provides A Clue

When the COVID-19 pandemic struck in 2020, labor, education and retail went virtual with tech companies of all stripes seeing a boom.

Big tech performed especially well and hedge funds played a significant role in the purchase of those equities.

Times have changed as a recession threatens the U.S. economy, according to data released by Goldman Sachs Group Inc. GS.

What Happened: Data issued by Goldman that was shared on Twitter showed hedge funds' exposure to the TMT industry (technology, media and telecom) was at its lowest level going back to 2016. This could be taken as an indication that hedge funds are hinting at trouble ahead.

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“Hedge funds are now underweight TMT stocks by -5.2% vs. SPX, the most [underweight] level ever in the history of our [prime brokerage] data set (back to 2016),” Goldman wrote in a note to investors.

GOLDMAN: “.. hedge funds are now underweight TMT stocks by -5.2% vs. $SPX, the most [underweight] level ever in the history of our [prime brokerage] data set (back to 2016).” pic.twitter.com/79TbPVLPsl

— Carl Quintanilla (@carlquintanilla) November 30, 2022

Why It Matters: Hedge funds and investors are aware the economy follows an erratic but largely predictable cycle known as the economic cycle.

Hedge funds are preparing for a recession by selling off stocks in a sector that isn't recession-proof. The meteoric increase in tech stocks over 2020 and 2021 is now firmly in the rearview mirror, with the tech-heavy Nasdaq down 27% this year.

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"Many view tech as the new defensive sector with stable earnings, especially after Covid when tech earnings grew despite an economic recession," said the Bank of America report, published earlier this year. "But we believe tech earnings will prove to be not as defensive as many hoped."

Alphabet Inc. GOOGGOOGL, Amazon.com, Inc. AMZN, Meta Platforms Inc. META and Microsoft Corporation MSFT collectively lost more than $350 billion in market value in the third quarter after providing unfavorable outlooks for the rest of the year.

After a decade of unrestricted expansion, the tech giants have found themselves in an unexpected situation due to slowed revenue growth and efforts to cut costs.

Investors might be finding lucrative alternatives in other market segments that had traditionally lagged behind software and internet names as they continued to shift their focus away from the tech industry.

The Nasdaq decreased by about 28% over 2022, compared to the Dow Jones Industrial Average's decline of 6.19%. The Dow lagged the Nasdaq for five years prior to 2021.

Photo: Ground Picture via Shutterstock