Hedge funds: US value strikes back?
Growth vs. value has been an important theme in long/short hedge fund portfolios--and a recent source of pain for some and profit for others owing to trend reversals this year.
Amid slowing growth worldwide, growth stocks have outperformed value both in the US and Europe in the past decade and have been a profitable bet in long/short managers’ books.
- There are some inherent differences in what value stocks represent in the two regions. Looking at the composition of the MSCI US and Europe Value indices, the European bucket is much more sensitive to economic cycles, with about half the value stocks being from the financials, materials, industrials and energy sectors.
- In the US, those industries represent one third of the index, while 20% are old-tech stocks. Growth stocks’ performance has been largely fuelled by the FANGs (Facebook, Amazon, Netflix, Google), up 82.5% in 2015.
- However, the spread between value and growth stock performance in the US has increased since the beginning of the year. This recent outperformance of value seems to be synchronised with oil price movements.
- One potential explanation for this increase in correlation is the impact of falling oil prices on the energy sector: this has had a domino effect on banks and high yield credit spreads, eventually causing financing issues for many value companies.