Retail Investors Win Big Again With Hedge Funds Playing Catch-Up

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A Goldman Sachs basket of shares favored by individual investors surged more than 3%, triple the return of the S&P 500 and roughly seven times that of the tech-heavy Nasdaq 100, stuffed with companies that do well in a stay-at-home environment. Meanwhile, a similar basket of hedge funds’ top stock picks rose less than 1% as of mid-morning.

A signature narrative of the 2020 stock market has been the role of retail investors and their unwavering enthusiasm for the companies that stand to benefit from an economic reopening. The pros have remained much more skeptical, yet early evidence shows they may be starting to give in.

“You’ve seen very large investors talk about how bearish their outlook was and yet the market kept climbing and climbing and climbing,” said Katie Nixon, chief investment officer at Northern Trust (NASDAQ:NTRS) Wealth Management. “There is a little bit of not only catch-up, but a little bit of trying to get in front of what the next wave may be, which is the cyclical rotation.”

On Monday, in the midst of a 4% bearish reversal for the Nasdaq 100 that ranked with the largest of the dot-com days, hedge funds were selling stay-at-home stocks while scooping up shares that should improve most from a swift economic reopening, according to Goldman Sachs Group Inc (NYSE:GS).’s prime brokerage unit.

The firm’s data showed large clients of the firm were net sellers of high priced software stocks, and also shunned “The Big 5” — Apple Inc (NASDAQ:AAPL)., Inc (NASDAQ:AMZN)., Microsoft Corp (NASDAQ:MSFT)., Facebook Inc (NASDAQ:FB)., and Google parent Alphabet (NASDAQ:GOOGL) Inc. — for a sixth day straight. At the same time, among the industries that saw the highest net purchases were hotels, restaurants and leisure stocks. All in all, prime brokerage clients were slight net buyers, driven by short covering in value oriented sectors including industrials and financials.

For now, the timing of the trade has been a boon. Late Tuesday, results published in the New England Journal of Medicine said Moderna (NASDAQ:MRNA) Inc.’s vaccine candidate produced antibodies to the coronavirus in all patients tested in an initial safety trial. Then early Wednesday, reports that a medical journal will release positive news on a vaccine AstraZeneca (NYSE:AZN) Plc is developing with University of Oxford researchers also lifted sentiment, reviving the recovery trade that had lost momentum in recent weeks.

Retail’s love affair with airlines and cruise lines had stalled in the last 30 days, with none of the companies showing up on a list of stocks with the highest interest over the last month on the Robinhood investing app, data from website show. Still, the buying spree in March, April and May was so large that American Airlines (NASDAQ:AAL) Group Inc., Delta Air Lines Inc (NYSE:DAL)., Carnival (NYSE:CUK) Corp., Norwegian Cruise Line (NYSE:NCLH) Holdings Ltd., Boeing (NYSE:BA) Co. and United Airlines Holdings (NASDAQ:UAL) Inc. are all among the 20 most widely held securities among Robinhood clients.

An analysis of TD Ameritrade (NASDAQ:AMTD) clients in June showed investors continued to increase their exposure to stocks, purchasing shares of companies including Southwest Airlines (NYSE:LUV) Co., Delta and Norwegian. The infatuation with airlines was also apparent across exchange-traded funds, as the U.S. Global Jets ETF (ticker JETS) took in more than $800 million in the three months ended in June, the best quarter for the fund on record.

“The retail space has been extremely euphoric,” said Candice Bangsund, portfolio manager of global asset allocation at Fiera Capital Corp. “You’ve seen record numbers of brokerage accounts being opened, obviously government payouts keep consumer confidence fairly elevated, people feel wealthy, they’re getting these checks in the mail, and of course the sheer increase in the popularity of day trading while people are stuck at home and social distancing. That’s really taken off. And those flows have largely been directed toward the high-flying names.”

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