Hedge funds scale back bets on U.S. stocks as losses surge

Hedge funds focused on U.S. stocks are pulling back sharply after the longest continuous sell-off in more than a decade left many fund managers with huge losses.

S&P 500 falls for sixth straight week turbulent stretch Wall Street’s benchmark stock barometer fell by nearly a fifth on Thursday from a peak reached in early 2022, before surging on Friday.

The long-short equity fund, which prides itself on its ability to protect client money in a down market, has fallen 18.3% this year through and including Wednesday, according to estimates from Goldman Sachs.

The fund’s fall is staggering Invest heavily In riskier corners of the market, including money-losing tech companies, traders warned there could be a flood of redemptions that could close funds.

Funds that trade with Wall Street’s three biggest prime brokers Goldman Sachs, Morgan Stanley and JPMorgan Chase & Co. have pulled back sharply in positions over the past week, according to client reports seen by the Financial Times.

“When you see 2.5% or 3.5% daily moves in the index, those moves aren’t just driven by trading volatility,” said Peter Giacchi, who heads the floor-trading team at NYSE Citadel Securities. “Obviously deleveraging is going on – it’s not just noise, there’s clearly someone taking a risk.”

Goldman Sachs reported Thursday that total leverage among its U.S. long-short equity hedge fund clients fell for five straight days, the biggest drop since it began tracking data in 2016.

At Morgan Stanley, the total leverage of its U.S. long-short hedge fund clients — who try to profit from the rise and fall of stocks — fell this week to its lowest level since April 2020, and only since March 2020. The low was 15% higher. That year, the pandemic pushed the U.S. into recession. It noted that these hedge funds sold stocks again, but also increased their short trades, bets that could pay off if the stock or index fell in value.

Executives at JPMorgan’s prime brokerage, reporting similar findings, said there were signs U.S. stocks may be nearing a bottom, but they warned there was still room for funds to cut market exposure.

“The market continues to oscillate between total apathy and confusion,” Ron Adler, who works in JPMorgan’s trading desk, wrote to clients. “While the flow of funds has not yet fully ‘capitulated,’ we have started to see some of the more prominent long-only and hedge fund growth players starting to finally unwind some of these positions.”

Meanwhile, mutual funds and exchange-traded funds that buy U.S. stocks have registered nearly $37 billion outflow Within the past five weeks, according to data provider EPFR.

Nomura derivatives strategist Charlie McElligott said capital outflows appear to be driving stocks lower recently as large fund managers dump stocks to raise cash.

U.S. stocks plummet this year tighten monetary policy Attempts to control inflation well above policymakers’ forecasts. Central banks have already embarked on a path of sharp interest rate hikes aimed at cooling economic growth and, in turn, curbing rapid price increases.

But coupled with Russia’s invasion of Ukraine and a slowing Chinese economy, the move hit investor sentiment hard and sent volatility sharply higher.

“Fears of recessionary risks of a hard landing for the economy are trending again as central banks once again look behind the curve, which looks set to be sticky inflation,” McElligott said.

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