Hedge funds shift to stock-picking as momentum trade weakens

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Hedge funds pivot to stock-picking

Highlights

Hedge funds near a five-year high in short bets and are increasingly relying on fundamental research and relative-value trades, per Goldman Sachs' October report.
At the October Robin Hood investor conference, Bayberry Capital's Angela Aldrich announced a short-only strategy and pitched a short position in Coca-Cola Consolidated.
BlackRock's momentum ETF lost over 7% since July, reversing its prior 55% gain, as rising rates and heavy tech bond issuance pressure markets and force funds to rely on alpha generation.

Funds deepen fundamental bets

As reported by Business Insider, hedge funds are leaning more heavily on fundamental research and relative-value ideas as fast-moving markets become less forgiving for crowded trades. An October report from Goldman Sachs' prime brokerage desk finds that hedge funds are near a five-year high in short bets, underscoring how managers are using both sides of the book more actively.

That approach is also showing up in manager presentations. At Robin Hood's closed-door investor conference in New York in October, Bayberry Capital founder Angela Aldrich says she is launching a short-only strategy to complement her flagship long-short fund, according to two attendees cited in the report. Aldrich, a former Blue Ridge Capital investor, pitches a short position in Coca-Cola Consolidated, a publicly traded Coca-Cola bottler based in North Carolina. Coca-Cola Consolidated declines to comment, and Aldrich does not respond to requests for comment.

The search for opportunities is not limited to short selling. Even funds that remain focused on long positions are moving away from broad macro calls and toward identifying specific corporate winners and losers. Maverick Capital, for example, is betting on Intel as a potential major beneficiary of the artificial intelligence trade, with the firm's co-chief investment officer David Tykocinski arguing at the same conference that the thesis rests on Intel's manufacturing specialization rather than on a wider view of AI demand or interest rates.

Volatility tests the hedge fund model

Market conditions are reinforcing that shift. From the start of 2025 through the second quarter of this year, momentum investing, or buying stocks that are already rising sharply, delivers strong returns, with BlackRock's ETF tracking the strategy gaining more than 55% over that period. Many of the companies in that basket are tied to the AI boom, helping drive outsized gains at some hedge funds.

Since the third quarter begins, however, that trade reverses. BlackRock's momentum ETF, whose largest holdings include chipmakers AMD and Micron, loses more than 7% from the start of July. At the same time, interest rates rise and fixed-income markets come under pressure from heavy issuance by large technology companies and fiscal strains in countries including France.

That backdrop is increasing pressure on hedge funds to show they can generate alpha in more difficult conditions and justify their fees. On a JPMorgan Chase podcast released earlier in October, the bank's head of positioning intelligence, John Schlegel, says hedge funds generally make more alpha when markets are falling because they tend to protect capital reasonably well even if net exposure limits outright gains. In a recent BlackRock report, systematic investing head Raffaele Savi writes that hedge funds do not need markets simply to move up or down, but to move differently, adding that there is no permanent source of alpha, only the discipline to keep searching for a new edge.

Micron’s weakening technical setup and downside risk was the focus of our earlier article, which flagged that the stock had broken below a rising-wedge pattern after its June peak. We noted that falling RSI and MACD momentum indicators could open the door to further declines toward key support zones, unless Micron can reclaim major resistance levels.

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