Hedge funds make, hold and spend an enormous amount of money. According to Barron's, the largest 50 funds in America manage more in assets than the combined value of the entire British and German economies. As is increasingly common, this $6.1 trillion in assets is heavily weighted even within the top 50, with the largest funds holding vastly more assets than their smaller peers.
This sheer size is no mere academic curiosity. According to research by the RAND Corporation, hedge funds have a significant impact on the overall U.S. economy depending on investment strategy and appetite for risk. Hedge funds can create enormous wealth for the right investors, a critical issue in a nation that relies so heavily on personal investment to secure retirement.
They can also do a lot of damage.
"They can pose systemic risk to the financial system," researchers found, "that is, they can cause the initial failure of one or more firms or a segment of the financial system, disrupting a core function of the financial system."
Some of the most notable risk factors include poor information management, funds not keeping appropriate margins, aggressive short selling and trading with insufficient liquidity. Some or any of these could contribute to future financial crises.
So what the biggest firms buy and sells actually matters quite a lot to the economy at large, and according to WalletHub, these are the ten stocks that America's biggest hedge funds are unloading right now.
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10. Pfizer, Inc. (PFE)
Selling off stocks doesn't necessarily mean that an investor thinks the underlying company is weak. There are a lot of reasons to sell, including when an investor simply believes that the stock has reached the end of its role in his portfolio.
Hedge fund managers invest differently than most people do. While many investors will buy and hold stocks, often for decades as a part of their retirement portfolios, fund managers use their money differently. Their goal is to move stocks, sometimes quite quickly, in order to turn a profit.
As a result, often stocks (such as Pfizer) can find themselves caught in a selloff as traders unload month- or even day-long positions despite relatively steady performance in the long haul.
9. PepsiCo, Inc. (PEP)
Another reason a fund might sell is if the managers feel that a stock has peaked, even temporarily.
Now, without taking any position on whether PepsiCo has actually peaked, it makes a good example. Over the course of this past summer the company's stock price has fluctuated between approximately $114 per share and approximately $119 per share. This is a rough plateau after a long climb since the beginning of the year, when PepsiCo was valued at $105 per share.
After months of growth, it's possible that many firms feel like this stock has gotten as valuable as it's going to for the time being.
8. Medtronic PLC (MDT)
Medtronic is a medical device company with nearly 100,000 employees worldwide.
Now, despite the company's size many of America's biggest hedge funds are choosing to get out of that investment. It would be easy to assume that this has to do with the uncertainty around medical device tax and regulations, given the ongoing questions about Affordable Care Act repeal. There's no specific reason to believe this however.
In fact, it's important to remember that for a hedge fund to sell off Medtronic PLC means that it originally bought the stock in the first place. Someone who sells Medtronic thought it also had enough value to buy.
7. Alphabet, Inc. (GOOGL)
Welcome to the former Google. Of course, Google the search engine still exists as the portal to the Internet, but in 2015 the company changed its name to Alphabet to reflect the diversity of its business ventures.
Which is a major element when fund decides whether to sell or buy a given asset.
These days most big companies operate a range of enterprises. Some companies, like Haliburton, do business across many different industries, leading investors to judge how those (often vastly different) fields will lead to upstream performance. Others, like Alphabet, stay focused. A tech company at its core, the former Google is a focused investment, just one which does a lot of different things.
6. Merck & Co., Inc. (MRK)
Our third medical company and our second pharmaceutical company on this list.
Merck may well be a good example of short term trend lines driving market timing. Although the stock remains overall strong, with only a fairly small decline between its current value and this time last year, over the past three months it has trended sharply down, leading to a loss of more than two points on its overall position.
For hedge fund managers this may well be enough to drive them out of the stock, even if they remain confident about Merck's fortunes overall.
5. JP Morgan Chase & Co. (JPM)
There's something almost meta about hedge fund investors using financial institutions to make money, especially given how tightly success on Wall Street is interwoven.
And they have. Despite some fluctuations within the last month, investors who got into JP Morgan Chase over the past year have done very well, watching the stock climb from below $70 per share to over $90. This has been sustained growth, albeit growth which has stalled since early July. It may be no surprise that hedge funds are selling. After making more than 20% profits, now is a good a time to get out as any.
4. Johnson & Johnson (JNJ)
Now, this seems not to have affected the company's stock price, and so we have no reason to believe that it is driving hedge fund behavior besides coincidence of timing; however, this is an opportunity to discuss another reason why investors will sell off: when they smell blood in the water.
When a company is under attack, whether it's from major lawsuits, government regulators, takeover pressures or other direct threats to corporate solvency, it's common to see investors start to jump ship. As Johnson & Johnson's stock, at time of printing, remains solid there's no immediate indication that's happening here, however it's an important issue to look for when examining large-scale selloffs.
3. Eli Lilly and Co. (LLY)
As we referenced earlier, one of the key issues with any sell-off is to explore more in depth why hedge funds have begun to sell certain companies or industries overall. Often there's nothing more involved than market timing: for whatever combination of reasons, the firms believe that selling an investment will profit them right now.
However, large movement in certain industries can also indicate flagging confidence or at least growing uncertainty around that particular sector. It's instructional, for example, to examine the pharmaceutical industry. Although firms such as Eli Lilly, Merck and Pfizer retain strong stock histories, the pharmaceutical industry overall faces a number of structural challenges over the next five, 10 and 20 years. Many of these involve both legal and scientific issues which may have few, if any answers.
Does that mean that hedge funds think drugs are a bad long term investment? Not by a long shot. But it does mean that now is a good time to consider the future of an industry that seems to keep coming up.
2. Apple, Inc. (AAPL)
As an investment, Apple is in a very weird position.
The tech giant has surged back from its flirtation with bankruptcy in the mid-1990s. Today it holds over $250 billion in cash reserves, has reinvented the telephone, created the tablet market almost singlehandedly and (whether its rivals like or not) remains the status symbol for cool in most major segments of technology.
But for some reason, traders have begun talking about it as a squishy investment. Analysts and investors talk about the company's "disappointing" performance despite trading at over $150 per share, and a company that has grown its stock value by nearly 50 percent in the past year is criticized for not innovating quickly enough.
This may be a smart stock to get out of. Its value may have plateaued. Just don't tell all the customers at your local Apple Store.
1. Kellogg Co. (K)
Michigan has quite a few things going for it other than the Big Three car companies (one of which is now no technically an overseas subsidiary). It has Dow Chemicals, headquartered out of Midland. It has Whirlpool Corporation, located in the improbably sleepy Benton Harbor. It has Jim Harbaugh, operating out of Ann Arbor.
And it has the Kellogg Company, a Battle Creek corporation whose products have probably graced the shelves of almost every single person reading this article.
Unfortunately, as we noted earlier in this piece, sometimes the decision to sell a stock is complicated… and sometimes it makes pretty quick sense. To say that Kellogg is in decline would be to miss the forest for the trees. Over the past five years the company has actually done quite well, and today its stock price is approximately 20 points up from this time in 2012.
Over the past one year, however, the stock has fared less well. When you drop 13 points in a long, steady decline… well, you can expect some investors to start getting out.