Hedge funds are saying they can't make money on 42 of the most important stocks in the world


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REUTERS/Mike Blake

Hedge funds aren't supposed to just generate a few percentage points of return for you - they're supposed to hit it out of the park.


They're supposed to generate "alpha."

But according to a Morgan Stanley report, increasingly hedge fund managers are saying that they can't do that investing in the 42 largest stocks in the S&P 500.

Morgan Stanley calls them "the $100 billion club" because they all have a market cap in excess of $100 billion. These 42 stocks have a combined market cap of the next largest 458 stocks combined.

This is something to think about because these are the stocks that lead indexes up and down. If you're a retail investor in the market, you likely own them or they're driving something you're invested in.


There has been a lot of talk about how FANG - Facebook, Apple, Netflix, and Google - can drive the entire Nasdaq, for example.

"These 42 names matter deeply for the performance of most benchmarks, and the competitive impact of these companies affects nearly all US companies at some level," Morgan Stanley wrote.

The hedge fund managers say that these stocks are "picked over," and worry about their ability to attract investor money when they're putting it in to such popular names. The point of the note is to say, yes, it is possible to generate alpha with these stocks.

"Hedge funds currently have an anti mega-cap bias, under weighting these names in favor of small and mid-cap stocks. Is that smart? The facts show that this $100 billion club is one where historically a sizeable amount of alpha can be generated," the note said.

It isn't easy, though. The correlation between these mega caps and the market has risen since summer 2014 and is now at a historic high.


That means that if you think the stock market isn't going to do better anytime soon, you may not want to be holding stocks moving in lockstep with the market, whether you're getting paid to generate alpha or not.

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Morgan Stanley