The implication of some in the financial media is that hedge funds and hedge fund managers are demonstrating a groupthink or herd mentality with respect to the investments they are making. The argument, which seems ludicrous, may or may not have merit. Of course, conventional wisdom suggests this to be an improbable argument because hedge fund strategies are extremely diverse. In a well-functioning market, hedge funds will experience a full range of outcomes—a few funds demonstrating record gains, a small number failing completely, and the remainder falling somewhere in between the extremes. The hedge fund’s compensation, or fee structure, provides a tremendous incentive for aggressive investment and this is no less the case during a bull market such as the one experienced over the past 4 years or so.
Based on 13F Filings
The following stocks appeared in multiple hedge fund portfolios as top ten holdings. The stocks are ranked in order below. The ranking is based upon the number of hedge funds holding the stock as one of its top ten holdings.
1. General Motors Company (GM) – a top ten holding in 75 hedge funds
2. Google Inc. (GOOG) – a top ten holding in 60 hedge funds
3. Apple Inc. (AAPL) – a top ten holding in 58 hedge funds
4. American International Group, Inc. (AIG) – a top ten holding in 54 hedge funds
5. Hertz Global Holdings, Inc. (HTZ) – a top ten holding in 40 hedge funds
6. Citigroup Inc. (C) – a top ten holding in 38 hedge funds
7. Time Warner Cable Inc. (TWC) – a top ten holding in 38 hedge funds
8. Facebook, Inc. (FB) – a top ten holding in 36 hedge funds
9. Amazon.com Inc. (AMZN) – a top ten holding in 33 hedge funds
10. Microsoft Corporation (MSFT) – a top ten holding in 27 hedge funds
These are examples of the statistical data the financial media has used to suggest groupthink among hedge funds and hedge fund managers. As Mark Twain famously stated, “There are lies, damn lies and statistics.”
Is This Groupthink?
With more than 10,000 hedge fund firms in existence, can one regard the fact that 75 of these firms have a substantial stake in General Motors to be statistically significant? Can it be regarded as statistically significant that 27, roughly one-quarter of one percent, of hedge fund managers have chosen Microsoft Corporation as one of its funds top ten holdings? The answer is obviously a resounding no!
If there is no statistical significance in the small number of hedge funds that have similar top ten holdings, then it is fundamentally flawed to conclude that hedge fund managers have fallen victim to groupthink, herd mentality, or pack behavior. It is much more likely that these statistics reveal similar methodologies for formulating trades or analogous strategies. The charge of group-think is unwarranted, irresponsible and potentially dangerous, in that it implies market manipulation.
Journalists must conduct a responsible analysis of all relevant facts and avoid any temptation to juggle statistics in support of a hypothesis, theory or premise that promises a provocative headline.