Should Investors be Worried About a New Tech Bubble?

In an article titled “Why this Tech Party isn’t like 1999”, CNN Money argues that today’s tech valuations are much more sound than those in 1999, and the fundamentals of today’s tech giants are in a much better position, boasting strong balance sheets with loads of cash. We agree, but there’s a lot more to it than the article mentions. Utilizing the Novus platform, we’ll take a deeper look, and even discover which tech stocks hedge funds think are the next big thing.

Hedge Funds Like the Tech Sector

As you can see below, hedge funds, on average, continue to keep Technology as their second largest sector allocation, behind only Consumer Discretionary. Remember that in 1999, right before the bubble popped, hedge funds went all in, with sector allocations nearing 30%. The Novus chart below shows us that hedge funds, on average, allocate tech around 15%. This is obviously a huge difference, as a massive tech market upheaval would have much less of an impact on their books.

It’s also important to note that hedge funds are underweight in the tech sector by 4% relative to tech’s exposure in the S&P 1500, meaning that as the valuations of technology companies grew, their weights in the index increased while hedge funds kept their exposures mostly unchanged.

This is a far cry from what happened in 1999. In a paper for Yale University, “Arbitrage at its Limits: Hedge Funds and the Technology Bubble,” Markus Brunnermeier and Stefan Nagel remind us that within “just one quarter, hedge funds increased the weight of technology stocks from 16 percent to 29 percent in September 1999. The market portfolio weights only changed from 14 percent to 17 percent.” Looking through this lens, the likelihood of a current tech bubble decreases, and if anything, hedge funds expect the usual amount of growth in the sector.

Below you can see the average hedge fund relative category exposure over time. Since 2010, hedge funds have remained relatively consistent in their exposures. But this brings us to another question: if hedge funds have faith in the tech sector, which securities are they getting behind?

Best Tech Stock Pickers

To identify the top stock pickers in technology, we ran screens on our Public Ownership database, which consists of thousands of managers and over a decade of history. By isolating the funds with the best stock selection skill, revealing the managers that consistently invest in stocks that beat the market by the widest margins, we can determine which stocks the best stock pickers are buying into.

Below you’ll find the top ten tech stock pickers and their top three tech trades for last quarter.

A whopping five of the top ten stock pickers hold positions in Facebook, with Valiant recently adding to their already sizable position. Apple is tied for first at five managers as well, but they are not adding as much of last quarter, and in fact, four managers have trimmed their positions. The third most popular name for the top stock pickers is a long time favorite of hedge funds, Google, which is the top add for Valiant, Soroban and Shannon River. Sunedison and Mastercard have both moved up in ranks, as they take the fourth and fifth most widely-held companies among the group.

Taking a look at the rest of the list, we come across a few unfamiliar names as well. New Relic, an app-analytics company which recently had its IPO, boasted strong returns for Matrix, and Akamai Technologies, a cloud computing service, brought home nearly 2% for Shannon River. If you haven’t heard of some of the stocks on this list, now is the time to pay attention.

Don’t forget to download our exclusive guide, “How to be a Data-Driven Investor in a Big Data World,” to learn how the top investment institutions are leveraging their manager transparency to gain serious insight into their portfolio and manager analysis.