Hedge Funds Shift Focus: Rapid Sell-Off in Utilities and Increased Investment in U.S. Materials Stocks

Global hedge funds have significantly increased their sell-off of U.S. electric and water utility stocks, marking the fastest pace of divestments in two months, while showing a marked preference for U.S. materials stocks, according to a report by Reuters, which cites a recent analysis from Goldman Sachs’ prime brokerage desk.

The Goldman Sachs note highlights that utility stocks—excluding gas utilities—emerged as one of the most sold sectors in November, despite the fact that the Dow Jones Utility Index saw a gain of more than 3% last week and surged over 20% year-to-date in 2024. Hedge funds have been reducing their exposure to electric and water utility stocks, even as the sector has performed well.

On the other hand, U.S. materials stocks have become the most net-bought sector on Goldman Sachs' trading desk, with a broad-based surge in buying activity. This focus has been particularly strong on sub-sectors such as chemicals, metals, mining, and paper and forest products. The S&P index tracking materials stocks rose by 1% last week and has increased over 9% in 2024. Over the past month, hedge funds have shown consistent interest in materials, with the sector being one of the most net-bought across three of the last four weeks, according to Goldman Sachs.

This shift in hedge fund activity reflects a broader change in investment strategy as hedge funds adjust their portfolios in response to evolving market conditions. Materials stocks, typically linked to global economic growth and industrial demand, may be benefiting from optimistic expectations about economic resilience or infrastructure spending. Conversely, utilities, which are generally viewed as safe, defensive investments, could be losing their appeal in an environment where risk-on sentiment is gaining ground. Hedge funds appear to be recalibrating their approach as they navigate this changing market environment, betting on sectors that are poised to benefit from broader economic trends and infrastructure investments.