Home Finance U.S. stocks hiccups, equity hedge funds seek cushioning in market rally

U.S. stocks hiccups, equity hedge funds seek cushioning in market rally

Equity hedge funds are waiting out for the market bounce despite sustaining significant paper losses on negative bets since June, according to industry officials and market data. Equity hedge funds are still unsure of where U.S. equities are headed.

The S&P 500 has recovered 17% since mid-June on signals that prices may be stabilising after falling more than 20% in the first half amid concerns that aggressive rate hikes by the US Federal Reserve intended to combat inflation might trigger a recession.

Hedge funds, based on what is known from prime broking professionals and fund managers, have stayed out of the rally to examine more economic indications before readjusting their portfolios.

Hedge funds are holding a record $107 billion in net short positions, often known as negative market bets, in S&P 500 futures, according to calculations by BNP Paribas based on regulatory statistics from last week.

Prime brokers also highlight that the uncertainty among affluent consumers with $1.1 trillion in worldwide assets shows the rise may not last long.

A senior broker at a Wall Street bank claimed that this is likely one of the market’s most despised rallies across all customer groups, stressing that funds had been unwinding long holdings during the surge. He further stated that the start of August marked one of the most significant de-risking weeks in the previous five years.

Although Fed officials aren’t promising it, some investors believe the Fed may pause from tightening its monetary policy earlier than previously anticipated, which is one of the main reasons stocks are surging.

Some of the market’s recent advances have likely been driven by investors unwinding or covering such pessimistic bets, the sources added, as not all unfavorable hedge funds have indeed been able to sustain their short holdings. In such a procedure, stocks that the funds had acquired to sell short are purchased.

Chief market strategist Kris Kwait at Commonfund, who is an asset manager that invests in hedge funds, revealed that there was a lot of coverage throughout the market’s upturn.

Kwait said that it was not a good indicator of the rally’s longevity as hedge fund coverage seemed to be its main driver.

Goldman Sachs statistics ran us over when the rally picked up momentum in July, hedge funds’ long position sales and purchases to offset short positions in non-essential consumption goods stocks, for instance, were among the biggest in the previous five years.

According to Max Grinacoff, a U.S. equities and BNP Paribas’ derivatives strategist, short covering persisted in August, especially last week when data on the Consumer Price Index on Wednesday that suggested inflation may have peaked caused stocks to rise.

Despite having unrealized gains of $162 billion this year, short sellers have seen unrealized losses of $174 billion since June 16, according to financial analyst firm S3 Partners.

A note from Deutsche Bank analysts on August 13 unveiled more information, stating equity positioning for institutional investors as a whole has gradually increased in recent weeks but has remained in the 15th percentile of its scope since January 2010, indicating that it has only been lower than 15% of the time during the past 12 years.

Hedge funds have dramatically decreased their total risk this year despite macroeconomic uncertainty. According to a Goldman Sachs analysis, the net leverage of equity long-short and solid hedge funds was 48% at the end of July as opposed to roughly 70% in January.

Next month, when liquidity is anticipated to grow as the summer break comes to an end and new economic data becomes available, hedge fund portfolio administrators will likely reevaluate their tactics, according to two prime broker executives.

Investors may still be pessimistic about the prospects as a whole, according to Grinacoff of BNP Paribas. But, he continued, to the degree that they are being caught off guard, they may be required to either cover or perhaps take part in the upward rally.

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