Most Crowded Names Ahead of Q2 2020

As we enter into Q2 2020 earnings season, we wanted to revisit the Hedge Fund Concentration topic and highlight key crowded names across the major US sectors.

We shared a 2019 paper that posited that the level of concentration has been consistently on the rise, stemming from three key reasons:

1. The number of public companies has been essentially cut in half over the past 20 years
2. The number of fund managers has increased over that same time
3. As smaller managers have found it more difficult to raise capital, bigger managers have dominated the equity markets - typically holding much larger positions in their ideas

Using Wolfe Research’s data, we can see how this factor has performed over time. This is what cumulative return has looked like for HF Concentration over the past 12 months:

We need to look no further than a month ago to understand how much danger is inherent to the combination of a crowded trade plus a stressful period in the market. The hedge fund crowding factor fell 6 standard deviations over a period of 2 weeks, an event rarely seen in the history of the factor. While the factor sharply rebounded, it still remains well below levels earlier this year. We highly recommend you read the Wolfe paper that goes into further detail on the construction of the factor.

Q2 2020 - Most Crowded Names Across Key US Sectors

Using Omega Point’s Security Search tool, we can find the most crowded names in the Russell 3000 universe that have significant idiosyncratic risk, with the following criteria:

Market Cap: Minimum $500mm
Liquidity: Minimum $5mm ADTV
Idiosyncratic Risk: Minimum 67%
Hedge Fund Crowding Exposure > 1.0

The idiosyncratic risk requirement is enforced so we can identify those names that have the highest susceptibility to a sharp sell-off or rally after a negative or positive earnings surprise. A hedge fund crowding exposure > 1.0 for a given security means that if the HF factor falls by 1%, it will lead to a 1% drop in the security price.

We identify 93 crowded names with the above criteria across 10 GIC sectors (we found no crowded names in Financials), largely concentrated in Health Care, followed by Consumer Staples and Information Technology.

And below we highlight the most crowded names in each sector (capped at 5) that have not yet reported earnings for Q1 2020.

The above list includes coronavirus vaccine makers, hand sanitizer companies, oil shipping, and transportation companies. If you have meaningful exposure to any these companies, we would be happy discussing with you possibilities to hedge out the crowding risks associated with them ahead of their earnings calls.

US & Global Market Summary

US Market: 4/24/20 - 4/30/20

• After a strong start to the week that yielded one of the best Aprils in years, the market saw weakness to close the week, with the S&P 500 down 2.8% on Friday alone (not captured in above chart).
• Weakness appeared to be driven by hairy 1Q tech earnings driven by AAPL and AMZN, Trump’s threats to further damage global supply chains by imposing tariffs on China, and profit taking after the April rally.
• Initial jobless claims hit 3.84 million last week, bringing the total over the last 6 weeks over 30 million.
• On Wednesday, the government reported that GDP had contracted 4.8% in the first quarter, a number poised to worsen after revisions are in. Economists expect 2Q GDP decline to be even more severe.

‍Factor Update: Axioma US Equity Risk Model (AXUS4-MH)

• Strength in Volatility persisted as it shot up over one full standard deviation and entered Extremely Overbought territory.
• The rise in Value accelerated, as it earned an Overbought label after a +0.82 SD move.
• Market Sensitivity continued its ascent deeper into Extremely Overbought, now at 2.8 SD above the mean. Recall that this factor was at -3.45 SD below the mean on March 18th.
• Earnings Yield (another proxy for Value) moved closer to Extremely Overbought territory at 1.83 SD above the mean.
• Profitability continued to plummet from its recent peak of +6.47 SD above the mean on 3/20, falling -0.72 SD to where it now hovers right around the mean.
• Size was the week’s biggest loser, falling over 1.5 standard deviations after hitting an apex of+3.2 SD above the mean on 3/18. It is now an Oversold factor after the big move.
• US Total Risk (using the Russell 3000 as proxy) increased by 61bps.

‍Factor Update: Axioma Worldwide Equity Risk Model (AXWW4-MH)

• Market Sensitivity ascended further into Extremely Overbought space after a +0.7 SD move, now sitting at 3.12 SD above the mean.
• Value crossed into Overbought territory after a sizable gap up, now at +1.4 SD above the mean.
• Volatility is heading to almost +3 SD above the mean after a +0.62 SD move this week worldwide.
• The rally in Growth continued, as it now sits at +0.75 SD above the mean.
• Exchange Rate Sensitivity saw enough strength to lose its Extremely Oversold designation for now, at -1.99 SD below the mean. As a reminder, we dug into this factor over the past few weeks (Part 1 and Part 2).
• Ongoing weakness in Earnings Yield caused it to fall out of Overbought space as it heads back towards the mean.
• Profitability also continued to fall from Extremely Overbought territory two weeks ago, now at +1.32 SD above the mean.
• Mirroring the US, Size was also the biggest loser internationally, falling a meteoric -1.32 SD to end the week at -1.43 SD below the mean. It is now an Oversold factor based on our normalized framework.
• Global Risk (using the ACWI as proxy) increased by 24bps.

Regards,
Omer