How Are Hedge Funds Preparing for the Santa Claus Rally?

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‘Tis the season for Mr. Market’s favorite time of the year. History shows that U.S. stocks tend to perform better from November through April than any other six-month period. During that timeframe, stocks often experience what’s known as the Santa Claus Rally, when stock prices make a noticeable rise during the final week of December. While there are a variety of ways to take advantage of this seasonality, hedge funds are focusing on a few specific areas of the market.

In the third quarter, the 50 largest hedge funds increased their equity exposure by 3.8% from the prior quarter, according to data from FactSet. The funds raised their exposure in nine of the 10 major sectors, but the majority of buying was directed toward Information Technology, Consumer Discretionary, and Energy. Telecom Services was the only sector to receive less exposure. Hedge funds did not appear to be swayed by higher or lower prices. The Information Technology sector posted the second largest increase in value among all 10 sectors, while Energy posted the largest decline.

Surprisingly, hedge funds sold the biggest name in technology. Apple (NASDAQ:AAPL) recorded the second largest sale ($994 million) in aggregate during the quarter, despite shares jumping 8.5% with the help of two new iPhone 6 models. Mallinckrodt (NYSE:MNK), a global pharmaceutical company, was the only company to experience more selling than Apple. However, Apple remains the largest holding of the aggregate portfolio, comprising 1.6%, or nearly $13 billion, of all equity holdings among the 50 largest hedge funds.

Shire PLC (NASDAQ:SHPG), which became an acquisition target for AbbVie (NYSE:ABBV), was the top purchase for hedge funds. The market value purchased in this company was nearly $1 billion more than the next closest company, eBay (NASDAQ:EBAY). AbbVie and Shire reached an agreement in July, and shares of Shire surged almost 17% in the third quarter. Nonetheless, the deal was ultimately cancelled in October.

In regards to new positions, Alibaba (NYSE:BABA) was easily the top addition made by hedge funds in terms of market value ($4.2 billion). The retail giant held its initial public offering in September and was the top buy among five of the 50 biggest hedge funds, while 21 of the 50 hedge funds held a position in the company. Since its IPO price of $68, Alibaba shares have surged 80%.

Relative to the S&P 500 weightings of sectors, hedge funds were most overweighted the Consumer Discretionary sectors, while Consumer Staples and Financials were the most underweighted sectors. Overall, 85% of dollars were directed toward American equities.

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