According to Morgan Stanley’s latest commentary to institutional clients on Thursday, computer-driven macro hedge fund strategies sold $20 billion in equities on Wednesday, with plans to divest another $25 billion in the upcoming week following a significant stock market decline. This event marks one of the largest risk-unwinding episodes in the past decade.
The sell-off intensified after disappointing earnings reports from Tesla and Alphabet, prompting a heavy retreat from stocks on Wednesday. The Nasdaq Composite, particularly sensitive to tech stocks, experienced its worst single-day decline since October 2022, dropping 3.6%.
Initially characterized by rotational volatility, the recent market dynamics have evolved into a widespread deleveraging across broad indices, noted Morgan Stanley. The bank warned that if volatility persists, the ongoing sell-off could escalate rapidly. They indicated that a 1% decline in global equities could trigger further sales of up to $35 billion, while a 3% drop could lead macro hedge funds to offload as much as $110 billion.
Despite stronger-than-expected GDP data supporting a rebound in U.S. stock indexes on Thursday afternoon, concerns lingered among market participants. James Koutoulas, CEO of hedge fund Typhon Capital Management, highlighted that momentum stocks continue to trade above their intrinsic value even after Wednesday’s sell-off. He observed a historical pattern where interest rate hikes precede economic downturns, suggesting investor optimism may be challenging this trend.
In response to the market turbulence, hedge funds are reportedly becoming more bearish, reducing long positions in anticipation of further declines while maintaining or increasing short positions on stocks expected to fall, according to insights from Morgan Stanley. Portfolio managers focused their selling predominantly on information technology, consumer staples, and material sectors.
Goldman Sachs also reported an uptick in short positions among its clients in macro products such as large-cap and corporate bond exchange-traded funds (ETFs) following what some described as a market “bloodbath.”
Despite hedge funds ending Wednesday with losses, they managed to mitigate the damage compared to broader market indexes. According to Morgan Stanley, global hedge funds on average fell 0.67%, with equity long/short funds in the Americas experiencing a steeper decline of 1.04%.
Reflecting on the current market environment, Mario Unali, head of investment advisory at Kairos Partners, noted that hedge funds are navigating through one of the toughest drawdown periods in an otherwise positive year.
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