Hedge funds globally have turned the most bearish they’ve been on equities this year, as sticky inflation and renewed geopolitical concern have dragged stock markets lower. Short sellers, meanwhile, have been raking it in over the last 30 days.
Hedge funds ditched long positions and added short ones across all regions led by North America, Europe, and to a lesser extent developing Asia, Goldman Sachs said in a note to investors this week.
A short or bearish position bets that an asset will decline in value, while a long position anticipates a price increase.
After ending each of the last three months with a net bought position, hedge funds held a net sold position by mid-April, the note said.
The U.S. S&P 500 stock index is down roughly 4 per cent so far in April, while Europe and China indices have fallen about 2 per cent each.
The amount of net leverage used by stock picking hedge funds to borrow for trades declined 1.9 per cent this month so far, suggesting “a more guarded posture and reduced risk appetite by hedge funds,” the Goldman note added, citing data to April 16.
“We are seeing significant interest in market neutral and long short equity managers due to investor concerns relative to high U.S. equity valuations, stubbornly high inflation, and geo-political risks,” said Don Steinbrugge, founder and chief executive of Agecroft Partners, a hedge fund consulting firm.
Consumer discretionary stocks, where companies produce nice-to-haves such as luxury goods, appliances and automobiles, drew the most shortsellers, the note said.
Hedge funds also continued to short energy companies even as increased tensions in the Middle East have lifted energy prices and generally boosted energy stocks.
Traders added long positions in consumer staples such as food and beverage companies and also piled into health-care stocks, the Goldman note also showed. Hedge funds kept buy positions in semiconductor and related equipment stocks which remained at multi-year highs.
Allocations to software dropped to three-year lows as many hedge funds have begun to short the sector, the Goldman note added.
Meanwhile, traders have made a mark-to-market profit of more than US$25 billion up to Thursday from covering their short positions, said Ihor Dusaniwsky, managing director of predictive analytics at S3 Partners, more than erasing their US$14.8 billion in losses so far this year.
Short sellers were in a bind for most of last year as a raging bull market, partly powered by enthusiasm around AI as well as hopes of an early rate cut, forced them to book nearly US$190 billion in losses for 2023.
The current weakness in the market allows them to cover a portion of those heavy losses.
Overall U.S. and Canadian equity short exposure fell by US$50 billion to US$1.08 trillion in the last 30 days, largely due to a fall in the mark-to-market value of short positions and short covering, according to S3 Partners.
Mark-to-market change is the method of measuring the value of assets that can fluctuate over time, adjusting the asset’s value to reflect its current market price.
-- Reuters
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