Hedge funds are positioned to benefit from an increasingly favorable environment for stock-pickers in the U.S., according to Goldman Sachs Group Inc. 

One measure of funds’ use of leverage to take positions is close to record highs, suggesting they are “well-timed to take advantage” of improving conditions for stock picking, strategists including Ben Snider wrote in a note dated Feb. 21, after analyzing the holdings of 758 hedge funds with $2.3 trillion of gross equity positions at the start of this year. “An increasingly micro-driven market bodes well for hedge fund returns.”

The S&P 500 Index members that will probably outperform in coming months include online streaming leader Netflix Inc., gas explorer EQT Corp. and computer processor maker Advanced Micro Devices Inc., the Goldman team wrote. The assessment considers distribution in returns and hedge funds’ top long positions last quarter.

Fears of recession and increased interest-rate volatility had turned 2022 into a macro-driven year for equity returns worldwide. Falling correlations among individual stocks over the last few weeks, however, suggest the environment for stock selection and active strategies is improving. The change implies that stock moves are more likely to be due to specific fundamentals rather than macro news.

The MSCI All Country World Index’s average pairwise correlation reading in January touched the lowest since October 2021, while the variance in one-month returns spiked to an above-average level, off pandemic lows, Bloomberg Intelligence strategists Gina Martin Adams and Gillian Wolf, wrote in a Feb. 2 note.

“Hedge fund returns have generally been stronger in micro-driven return environments, such as the mid-2000s, than in macro-driven market environments, like last year,” the Goldman team wrote.

This article was provided by Bloomberg News.