As Hedge Funds Dump Everything Else, They Buy Energy & Material Stocks At Fastest Pace In 5 Months

It was a holiday-shortened week so not only was Michael Hartnett's latest Flow Show more of a Flow Short, but Goldman did not even published its latest "must read" Weekly Rundown note which summarizes the key views from across the bank. Instead we just got the latest Prime Services Weekly report.

What it showed is that one week after we noted that hedge funds are dumping record amount of tech stocks to retail investors...

.... and are also selling an selling broader extremely overvalued, illiquid and top-heavy market at fastest pace in two years,

... in the first week of July, Goldman's Prime Brokerage reports (full note available to pro subscribers) that global equities were modestly bought for the first time in 3 weeks, driven by long buys outpacing short sales (~1.4 to 1), as both macro products (i.e., ETFs) and single stocks were both net bought, led by short covers and long buys, respectively.

All regions (sans North America) were net bought, led by Europe and Asia, while Chinese equities were net sold for the 4th straight week.

By sector, Industrials, Financials, and Energy were the most net bought global sectors, while Communication Services, Info Tech, and Utilities were the most net sold.

Before we take a closer look at the buying, here is some top-down macro data of the broader hedge fund community:

• The GS Equity Fundamental L/S Performance Estimate rose +0.35% between 6/28 and 7/4, underperforming the MSCI World Total Return +1.37%, driven by beta of +0.67% (from market exposure and market sensitivity combined), partially offset by alpha of -0.32% on the back of long side losses. The GS Equity Systematic L/S Performance Estimate fell -0.59% between 6/28 and 7/4, driven by beta of -0.33% (from market sensitivity) and alpha of -0.26% on the back of long side losses.
• Overall book Gross leverage -1.6 pts to 273.6% (88th percentile 1-year) and Net leverage +0.2 pts to 75.0% (84th percentile 1-year). Overall book L/S ratio +0.5% to 1.754 (69th percentile 1-year). Fundamental L/S Gross leverage -0.3 pts to 190.5% (57th percentile 1-year) and Net leverage +0.6 pts to 55.6% (68th percentile 1-year

Taking a closer look at the week's action, GS Prime notes that after amid generally muted (and mostly bearish) flows, hedge funds net bought commodity sensitive stocks. Specifically, Energy and Materials the most net bought sectors on the US Prime book this week; collectively, these commodity sensitive sectors were net bought for the 3rd straight week and saw the largest net buying in 5 months, driven almost entirely by long buys.

After being net sold in 6 prior straight weeks, Materials was net bought for the 3rd straight week. On a subsector level, net buying in Containers & Packaging and Metals & Mining outweighed modest net selling in Paper & Forest Products and Chemicals.

Meanwhile, Energy has now been net bought in 3 of the last 4 weeks. On a subsector level, both Oil, Gas & Consumable Fuels and Energy Equip & Services were net bought on the week.

Still, these remain two of the most hated sectors across the hedge fund community, with Long/Short ratios for both at or near 5 year lows.

As shown in the chart below, the Materials long/short ratio now stands at 1.98, which is still well-below historical averages, in the 23rd percentile vs. the past year and 6th percentile vs. the past five years. Meanwhile, the Energy long/short ratio now stands at 1.34, in the 53rd percentile vs. the past year and in the 11th percentile vs. the past five years.

In other words, if hedge funds are indeed tired of picking up tech pennies in front of the inevitable bursting of the AI balloon, then buying in Energy and Materials - two sectors left for dead for years - has a long way to go to catch up merely to average historical levels.

More in the full Goldman note available to pro subs.