For hedge funds, investing with the crowd may not be a bad thing.
The most concentrated stocks, or those with the highest percentage of their market cap owned by hedge funds, have outperformed the S&P 500 steadily over the last 3 and a half years, ValueWalk reports. According to a Goldman Sachs report, since 2001 investing in the 20 most concentrated stocks outperformed the market 70%, by an average of 255 basis points per quarter.
The concentration strategy works best when markets are up, not so much when markets are flat or choppy. Most of the concentrated portfolio stocks are also mid-caps, which outperformed the large-caps that make up much of the S&P 500, from 2004 through 2007.
Year to date, the Goldman Sachs 20 most concentrated stocks have outperformed the S&P 500 by 316 basis points.
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