Hedge Funds Reach A 12-Day Buying Spree On Tech Stocks

After mostly losing out on the new-year bounce in the stock market's major winners, professional speculators are turning risk-on by snatching up technology shares.

‍

According to data gathered by Goldman Sachs Group Inc.'s main brokerage, hedge funds that make both optimistic and negative equity bets have been buying up computer and software producers for 12 straight sessions through Wednesday. Although movements during the first week of February were driven by unwinding short sales, the group has added to long positions in subsequent sessions, indicating growing confidence in the information technology industry.

‍

The increasing demand for IT stocks has defied the rising Treasury yields, a development that is meant to put pressure on valuation, particularly for stocks with high price tags. Fear of losing out has nevertheless crept up as a result of tech, which rose from being the S&P 500's poorest performer to the worst loser in the bear market last year. While the fast money increases its tech acquisitions, the two-day market retreat this week due to new concerns about rising interest rates runs the risk of causing a deeper stock rout. 

‍

Hedge funds weren't involved early, but momentum play is disproving the conventional wisdom that increasing interest rates should be detrimental to the technology sector, according to Craig Callahan, chief executive officer of Icon Advisers Inc. and author of "Unloved Bull Markets." Now they are pursuing.

‍

Due to rumors that the Federal Reserve would lower interest rates later in the year, IT companies had a solid start to 2023. While that confidence has subsequently turned out to be unfounded, tech stocks have maintained their dominance. Despite a disappointing results season, shares of companies like Meta Platforms Inc. have increased as several job layoffs allayed worries about declining profitability.

‍

Hedge funds are starting to warm up to the batch of tech equities after avoiding them for the majority of 2022. According to data collated by Goldman's team, including Vincent Lin, their share purchases on Tuesday increased to a one-month high, with almost all subsectors witnessing net inflows.

‍

This type of rekindled investor enthusiasm may be the reason why tech equities have overcome the bond market's valuation headwind. The tech-heavy Nasdaq 100 increased by roughly 3% this month, while the two-year Treasury rate increased by 49 basis points. The index fell 5% in August and almost 11% the following month the past two occasions yields increased this high in the summer of 2022.

‍

More significant gains have been made in the risky sector, with a Goldman index tracking unprofitable tech increasing its year-to-date returns to 24%.

‍

Danny Kirsch, head of options at Piper Sandler & Co., said: "You'd expect higher rates to put pressure on riskier assets. Instead, the higher rates go, the higher high-beta stocks go. Right now, it doesn't seem to matter.

‍

Taking a defensive attitude during the brutal selloff of 2022 improved the performance of the hedge fund sector. That is now keeping them back. Goldman's long/short funds have gained 3.4% so far this year through Tuesday, which is less than half the increase of an MSCI index.

‍

Goldman data reveal that despite the most recent purchasing frenzy, hedge funds' exposure to technology is still muted, with their long/short ratio remaining in the lowest decile of a five-year range.