US hedge funds are running their most cautious bets on stock prices in more than a decade, in a sign that many managers believe market declines may yet have further to run.
By the middle of this month, US funds had cut their net exposure — the difference between bets on rising prices and bets on falling prices — to around their lowest level since at least 2010, according to a Morgan Stanley note sent to clients. Funds in Europe and Asia, meanwhile, cut their bets to around the lowest level of the past year.
The caution comes as a number of top managers appear to be taking bearish positions in their portfolios, even though the S&P 500 has already dropped 18 per cent this year and the Stoxx 600 has lost more than 15 per cent.
US-based Bridgewater Associates, founded by billionaire Ray Dalio, has recently taken 27 short positions above the 0.5 per cent disclosure threshold in European stocks, according to data group Breakout Point. Those bets are worth around €9.8bn in total. The $151bn-in-assets group has already been positioning for a sell-off in US Treasuries, US equities and corporate bonds on both sides of the Atlantic.
And BlackRock star manager Alister Hibbert, one of the sector’s strongest performers, recently moved his portfolio so that bets on falling prices outweigh bets on rising prices.
The negative sentiment comes during a very tough year for equity hedge funds, many of which have been hit by a sharp sell-off in their holdings in fast-growing technology stocks, while also finding they have been holding insufficient short positions — bets on falling prices.
US long-short equity funds are down 14.1 per cent on average this year, while European funds have lost 8.3 per cent, according to Morgan Stanley. The first five months of this year mark the worst start to a calendar year for equity long-short funds on record, according to data group HFR.
Equity hedge funds have been “shelled” this year, “so when you are losing money every day you need to get out of harm’s way and live to play another day”, said Tiger Williams, founder of outsourced trading company Williams Trading.
The week to June 16 marked “one of the largest in terms of global short [position] additions we have seen in recent years”, Morgan Stanley wrote in the note. That came shortly before a 3.3 per cent rally in US stocks over the past week, only their second week of gains in the past 12 weeks, although they are still down sharply this month.
Among the casualties this year have been Chase Coleman’s Tiger Global, which was down 52 per cent in the first five months of the year, and fellow “Tiger cub” Lee Ainslie’s Maverick Capital, while Boston-based Whale Rock Capital and Dan Loeb’s Third Point have also suffered losses.