By Jeff Kearns
Bloomberg News
Sunday, November 23, 2008

Hedge funds cut stock holdings by almost two-thirds from a year ago, signaling that they are less willing to take risks amid tighter credit and almost $1 trillion in write-downs and losses, Goldman Sachs Group said.

Net holdings of equities decreased to 17 percent from 47 percent a year ago, David Kostin, who leads Goldman's New York-based portfolio strategy team, wrote in a note.

"Hedge funds may have returned closer to their roots as 'hedged' investors, less dependent on market direction to produce returns, migrated away from the levered long strategies that many funds pursued during the upward-trending market of 2002 to 2006," Kostin said.

Goldman's 19-stock index of companies most owned by hedge funds tumbled 60 percent this year through Thursday, led by drops of about 90 percent for MGIC Investment and AK Steel Holding. All but three companies in the gauge retreated more than 40 percent. The best stock, Lorillard, was unchanged.

Kostin cited an analysis of 705 hedge funds with $607 billion in stocks, down from a peak of $1 trillion last year. Hedge funds now own 3.5 percent of U.S. stocks, down from 4.5 percent in the third quarter, he said.