© Reuters. FILE PHOTO: Wall St. is seen near the New York Stock Exchange (NYSE) in New York City, U.S., May 4, 2021. REUTERS / Brendan McDermid / File Photo
By Carolina Mandl
NEW YORK (Reuters) – Still uncertain about the position of U.S. stocks, hedge funds are staying out of the market’s rally despite having suffered huge losses on bearish bets since June, according to a report. industry executives and market data.
After falling more than 20% in the first half of the year on concerns that aggressive interest rate hikes by the US Federal Reserve to curb inflation could trigger a recession, the S&P index has rebounded 17% since mid-March. 6 with signs the price could be stable.
However, hedge funds remained on the sidelines of the rally to further assess economic indicators before recalibrating their portfolios, top executives and fund managers said.
According to calculations by BNP Paribas (OTC:) based on regulatory data from last week, in a sign of their lackluster view of the market, hedge funds are valued at a record $107 billion in value. with net short positions – or negative bets on the market.
The skepticism of sophisticated investors with $1.1 trillion in assets globally suggests the rally may be short-lived, according to top brokers.
“This is probably one of the most unpopular rallies in the market across all customer segments,” said a top broker at a Wall Street bank, noting that funds have sell long positions in the bull run. “The first week of August was one of the biggest risk-reduction weeks we’ve seen in the last five years.”
Stocks are rallying in large part because some investors believe the Fed will pull back from tightening monetary policy sooner than previously expected, though Fed officials haven’t made that promise.
Not all hedge funds are able to maintain their short positions, and some recent market gains may have been fueled by investors removing or “covering up” their short positions. bet that discount, these people said. That process involves buying back shares that the fund borrowed to sell short.
NOT A GREAT SIGN
“There was a lot of coverage by hedge funds while the market was up,” said Kris Kwait, chief market strategist at Commonfund, an asset manager that invests in hedge funds.
Kwait added that the fact that the hedge fund appears to be fueling the rally is “not a great sign” for its sustainability.
According to Goldman Sachs (NYSE:) data, when the rally surged in July, hedge funds sold long and long positions to cover short positions in non-essential consumer goods stocks. , is one of the largest levels in the past five years, according to data from Goldman Sachs (NYSE:) .
Max Grinacoff, US equities and derivatives strategist at BNP Paribas, said the shortages continued through August and especially last week, following Wednesday’s Consumer Price Index data. suggesting that inflation may have peaked, sending stocks higher.
Since June 16, short sellers have incurred unrealized losses of $174 billion, though they still have raised $162 billion in unrealized gains this year, according to financial analysis firm S3 Partners.
Equity positioning for institutional investors has generally increased in recent weeks but remains at the 15th percentile of its range since January 2010, meaning it is just below 15% over the past 12 years, as of August 13 noted by Deutsche Bank (ETR:) analysts.
Amid macroeconomic uncertainty, hedge funds have significantly reduced their overall risk this year. According to a Goldman Sachs report, the net leverage of long-short hedge funds was 48 percent at the end of July compared with nearly 70 percent in January.
Hedge fund portfolio managers are likely to reevaluate their strategies next month, when liquidity is set to increase as the summer break ends and more economic data comes in. two top brokerage executives said.
“Investors are likely to remain bearish on the overall outlook,” said BNP Paribas’ Grinacoff. “But to the extent they’re caught offside, they may need to take cover or potentially participate in the reverse rally.”