For stock-picking hedge funds coping with 2023’s loopy markets, risks are starting to outweigh the rewards.
Pro managers who make both bullish and bearish equity wagers last week slashed positions on both sides of their book, also known as de-grossing, according to data compiled by JPMorgan Chase & Co.’s prime brokerage unit. The rush to tweak positions was frantic enough to push total client stock flows to the highest level since the retail-fomented short squeeze in 2021.
Q2 2023 hedge fund letters, conferences and more
Morgan Stanley’s hedge fund clients showed a similar pattern of risk reduction, albeit at a slower pace. Their de-grossing activity for the week was the largest this year. At Goldman Sachs Group Inc., fund clients pared positions in 12 of the past 14 sessions.
The retreat may mark a sentiment shift in a market where almost everyone started 2023 defensively before being forced to adjust to the gravity-defying advance. Up in all but two months since October, the S&P 500 has climbed 28% over the stretch, sitting roughly 200 points away from fully erasing 2022’s bear market.
“While the equity rally might be good for those who are long the market, it’s been quite challenging for HF shorts and the rally seems to be inducing broad capitulation in the form of de-grossing,” JPMorgan’s team including John Schlegel wrote in a note titled Throwing in the Towel ... De-grossing Accelerates Amidst Busy Earnings Week.
It’s the latest dose of pain that 2023’s rally has inflicted. Rather than sinking like most forecasters predicted, stocks have instead surged as the economy stood up to the Federal Reserve’s aggressive inflation-fighting campaign. Along the way, fast-money managers were compelled to cover shorts and chase gains, while strategists scrambled to raise their year-end price targets for the S&P 500.
Read the full article here by Lu Wang, Advisor Perspectives.
