Summary

• The top 50 hedge funds were overweight on large cap materials and consumer discretionary stocks for the 4th quarter.
• Hedge funds added 1% equity exposure to their portfolios for the 4th quarter.
• An under-weighted portfolio in small cap stocks implies fund managers expect muted stock gains in 2015 compared to 2014.

There’s a lot of different methods investors use to gauge the market’s direction. Charts can reveal trading patterns, ratios give way to valuations, and macroeconomic analysis can predict future trends.

Another way to get an idea of what’s happening is to simply look at what the institutional money is doing. And the highest echelon of institutional money management is the hedge fund.

A report by FactSet breaks down hedge fund holdings and sector weights for the 4th quarter of 2014. While past positions aren’t necessarily a predictor of future events, we can get a glimpse of how these fund managers see 2015 and what they did to prepare for a new trading year.

All data comes from the 13F filings of the top 50 hedge funds. Short positions, foreign traded issues, and non-equity holdings are not required to be disclosed although some funds do report them.

Hedge funds added 1% equity exposure to their portfolios for the 4th quarter suggesting a slightly improved outlook on the global economy. The top two sectors held were Technology (18.2%) and Consumer Discretionary (16.5%) while the greatest geographical exposure was the United States (85.4%). The largest increase geographically was Canada with major purchases of Restaurant Brands International Inc. (NYSE:QSR ) and Canadian Pacific Railway (NYSE:CP ). The largest decreases in geographic weight were led by Japan and South Korea.

We can see that the mindset of the majority of managers was that U.S. stocks would outperform going into 2015 while the increase in Canadian exposure suggests a slightly more bullish outlook for the region led by falling oil prices.

However, international markets have done far better so far this year than domestic ones. While the S&P 500 started off positively, it has since retracted — down -0.91% YTD. Meanwhile, the European and Asian markets have done considerably better. Japan in particular is experiencing explosive growth of 7.29 % YTD and hitting 15-year highs.

Based on where hedge funds had their holdings situated globally going into 2015, it looks like they called it wrong so far. We’ll have to wait for the results for the 1st quarter to see how these hedge fund managers have adjusted their geographic exposure to account for this unexpected turn of events.

Breaking Down Sector Weightings

Relative to the S&P 500, hedge funds were split evenly on sector outlooks with 5 overweight and 5 underweight.