Equity markets staged an impressive rebound since the August 5 sell-off but it appears that hedge funds (HFs) are fading the ongoing rally, Goldman Sachs analysts pointed out in a recent report.
Stocks surged impressively over the past two weeks, driven by a combination of factors, including diminishing growth concerns, reduced recession risks, a sharp reversal in volatility, and a shift in flows from Commodity Trading Advisors (CTAs) and rules-based funds, which have turned from a headwind to a tailwind.
In this context, fundamental long/short returns have risen by 0.6% in August, recovering from a decline of as much as 3.8% earlier in the month, and are now up 8.8% year-to-date.
But despite the recovery, Gross and Net leverage ratios have declined in August, pointing to a continued cautious stance with little recovery in risk appetite following July’s significant de-grossing, Goldman analysts note.
“In fact, from a flow perspective, HFs are on track to net sell global equities at the fastest pace since Mar ’22, driven by short sales in the US and long sales across the rest of the world,” they said. “Single Stocks and Macro Products are both net sold month-to-date (MTD).”
According to Goldman Sachs, hedge funds are selling large-cap stocks but buying small-caps in August.
Information Technology is the most net sold sector month-to-date, driven by shorts in Semiconductors and Semiconductor Equipment, partially offset by long buys in Software.
Consumer stocks have experienced significant de-grossing, with long sales in Discretionary and short covers in Staples. Amid lower interest rates, fund managers are increasingly favoring high-dividend stocks, leading to net buying in Energy, Utilities, and Real Estate sectors.
Regionally, North America has been the most net sold area in August, largely driven by short sales.
Developed Market Asia follows, led by Japan, which saw its largest 10-day cumulative net selling in over five years.
Emerging Markets also witnessed significant risk unwinds, primarily through long sales in China, South Korea, and Taiwan.
In Europe, stocks have been modestly net sold, driven by long sales, while short flows have remained relatively muted after substantial covering in July.
