Hedge Fund Internet Software Crowding

Hedge funds tend to pile into the same few stocks. In most sectors these crowded bets underperform. In previous articles we discussed the crowding of hedge fund energy as well as exploration and production bets. Internet software stocks show similar underperformance.

Hedge Fund Internet Software Aggregate

If markets were flat since 2004, the aggregate position-weighted hedge fund internet software portfolio (HF Aggregate) would have lost 25%. This is HF Aggregate’s risk adjust return from security selection (αReturn):

Chart of the cumulative risk-adjusted returns from security selection of the HF Internet Software Aggregate

Hedge Fund Internet Software Aggregate’s Residual Returns (αReturns)

Given the compounding of αReturns and internet software sector returns, the cumulative underperformance is even larger: Since 2004 HF Aggregate returned 200%. A portfolio with the same systematic risk as HF Aggregate (Factor Portfolio) returned 300%. Investors in crowded bets missed out on 100% in gains:

Chart of the cumulative total and factor (systematic) returns of the HF Internet Software Aggregate

Hedge Fund Internet Software Aggregate’s Total and Factor Returns

Hedge Fund Internet Software Crowding History

The following video shows the history of crowded hedge fund internet software bets. These are the stocks behind the record:

Current Hedge Fund Internet Software Crowding

The following are the currently crowded hedge fund internet software bets. Just two (long EQIX, short/underweight GOOGL) are responsible for over three quarters of the risk of HF Internet Software Aggregate:

Position (%)
Symbol Name HF Aggregate Market Aggregate Relative Share of Risk (%)
EQIX Equinix, Inc. 23.77 1.63 22.14 53.73
GOOGL Google Inc. Class A 10.51 44.39 -33.88 25.65
TWTR Twitter, Inc. 0.49 3.46 -2.97 4.65
ZNGA Zynga Inc. Class A 2.89 0.26 2.63 3.52
RBDC RBID.com, Inc. 0.00 0.17 -0.17 2.07
P Pandora Media, Inc. 2.41 0.53 1.88 1.87
RAX Rackspace Hosting, Inc. 3.13 0.86 2.27 1.76
SFLY Shutterfly, Inc. 2.32 0.22 2.10 1.38
WBMD WebMD Health Corp. 1.84 0.18 1.66 0.93
NERO NeuroMama Ltd. 0.00 0.74 -0.74 0.75
AKAM Akamai Technologies, Inc. 3.04 1.50 1.54 0.61
TRLA Trulia, Inc. 1.01 0.25 0.76 0.36
IACI IAC/InterActiveCorp. 2.83 0.66 2.16 0.34
YNDX Yandex NV Class A 2.32 0.81 1.51 0.33
MSTR MicroStrategy Incorporated Class A 1.54 0.20 1.34 0.31
LNKD LinkedIn Corporation Class A 2.20 3.20 -1.00 0.27
FB Facebook, Inc. Class A 21.76 22.54 -0.78 0.21
MELI MercadoLibre SA 0.00 0.81 -0.81 0.15
KING King Digital Entertainment Plc 1.05 0.63 0.42 0.13
ECOM Channeladvisor Corporation 0.42 0.06 0.37 0.11

The information herein is not represented or warranted to be accurate, correct, complete or timely.
Past performance is no guarantee of future results.
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Content may not be republished without express written consent.
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