The repositioning has been fast and deep among the biggest stewards of investment money, a retreat from risk that may aid the bull case on stocks.
From speculative stock pickers to computer-driven traders, equity exposure has been cut to the bone. Hedge funds that make both bullish and bearish equity wagers have slashed their risky bets to a five-year low, while quantitative strategies have gone outright short, Goldman Sachs Group Inc. said.
Similar trends are noted by analysts at firms from Morgan Stanley and JPMorgan Chase & Co., adding to a slew of evidence on deteriorating investor sentiment that some market watchers say may mark a bottom of the latest selloff, at least in the short term. Stocks rallied Friday and again early Tuesday.
“While markets remain on edge and conviction levels very depressed, it’s possible that the bounce has arrived,” JPMorgan analysts including John Schlegel wrote in a note. “The general view is that this is mostly short covering and therefore will be short-lived. However, given how low positioning is and how stretched some trends had become, it wouldn’t be surprising to us if the rally lasted a bit longer than people expected.”
Tracking the firm’s hedge fund clients, Schlegel said that the group’s gross exposure — a gauge of their risk appetite that takes into account both long and short positions — has fallen 30% from a recent peak, a drawdown that’s similar to what happened during the 2020 pandemic crash.
This time, the fast money has been quickly unwinding risk as the Fed started hiking interest rates to tame inflation, something that many fret would drag the economy into a recession. Such fear has sent stocks reeling, with the S&P 500 last week suffering in its six straight weekly declines, the longest losing streak in a decade.
Hedge-fund holdings in technology and consumer discretionary shares fell the most among major industries during the first quarter, regulatory filings compiled by Bloomberg show. Chase Coleman’s Tiger Global Management, for instance, exited 83 stocks, including Netflix Inc. and Adobe Inc., according to a filing Monday.
The violent selloff has forced many systematic macro strategies, including trend followers and volatility-targeted funds, to slash equity holdings. Last week, their exposure fell to the bottom of a five-year range that even if stocks resume selling, their unwinding would be relatively subdued, according to Morgan Stanley.
For instance, should the S&P 500 drop 5% in one day, the cohort would need to offload less than $20 billion of stocks in the follow week, analysts including Christopher Metli estimated. That’s down from an expected disposal of over $100 billion at the start of the year.
Goldman’s long/short hedge fund clients saw their gross leverage falling 12 percentage points during the week through Wednesday, the largest reduction over comparable periods sine at least 2016, according to data compiled by analysts including Vincent Lin.
Light positioning by hedge funds and quants is among indicators watched by Goldman’s Scott Rubner to determine whether investors have capitulated. With cash holdings elevated in mutual funds and day traders retreating, one missing ingredient to call the all-clear is a reduction of stocks in US household holdings and retirement accounts, he says.
“Tracking this cohort is my single and most important focus from the lows here,” he wrote in a note last week. “We have not capitulated, it is very slow on the way out.”
–With assistance from Melissa Karsh.
This article was provided by Bloomberg News.