Hedge funds rush to unwind bets on U.S. stocks as rally threatens performance: JPMorgan and Goldman Sachs
Global hedge funds are scrambling to adjust their positions as a relentless rally in U.S.-listed stocks threatens their performance, according to reports from JPMorgan Chase and Goldman Sachs.
The two financial giants warned clients that hedge funds have been facing challenges with their short positions since early June, with the unwinding of these bets becoming “extreme” in recent days. Short covering in U.S. macro products, including equity index and exchanged-traded funds, has reached levels not seen since November 2020, Goldman Sachs noted in a report on Friday.
Portfolio managers had initially positioned themselves for an economic downturn earlier in the year, anticipating interest rate hikes, sticky inflation, and geopolitical tensions. However, the unexpected strength of the U.S. bull market has caught many off guard, with the Nasdaq soaring over 42% and the S&P 500 surging over 17% this year. Even a basket of the most-shorted U.S. stocks has seen a 40% increase since early May, according to JPMorgan.
Despite the market rally, hedge funds have struggled to keep up, with their overall performance lagging behind the main stock indexes. The persistence of the rally has led to a shift in investor sentiment, with net buying reaching its highest level since October last year, driven mainly by investors covering their short positions.
However, hedge funds are not giving up on shorting opportunities, with increased short positions in sectors like staples, communication services, and info tech, according to Goldman Sachs. The two financial institutions, which run some of the world’s largest prime brokerages, have a unique insight into how large hedge funds and asset managers are adjusting their positions.
As the market continues to defy expectations, hedge funds will need to navigate carefully to avoid further losses and capitalize on potential opportunities in the ever-changing landscape of the financial markets.