Hedge funds have largely held back from participating in the recent market rebound following the unwinding of the yen carry trade over the past two weeks, according to new analysis from Goldman Sachs’ prime brokerage division.
Despite a significant rally that saw the Nasdaq 100 rise by 11% and the S&P 500 gain 8% since their lows on August 5, money managers have reduced their overall exposure to equities.
Goldman Sachs’ data indicates that hedge funds are on track to sell global equities at their fastest pace since March 2022, when Russia’s invasion of Ukraine shook the markets.
“Despite the market rebound, gross and net leverage ratios have declined so far in August, indicating little recovery in risk appetite following July’s significant de-grossing,” noted Goldman Sachs analysts, led by Vincent Lin.
This sell-off has been driven primarily by short sales in the U.S. and long sales globally, with net selling of both single stocks and macro products through August 21, according to Goldman Sachs.
Bruno Schneller, managing partner at Erlen Capital Management, told MarketWatch that while there’s optimism in the broader market, hedge funds remain skeptical about the rally’s sustainability and are wary of potential headwinds.
Schneller noted that despite ongoing institutional inflows into U.S. equities, hedge funds appear to be hedging against downside risks and are maintaining a cautious stance until there’s more clarity in the economic and market landscape.
North America has seen the highest net selling this month, driven by short sales. In the U.S., hedge funds have sold large-cap stocks while increasing their positions in small caps, per Goldman Sachs’ analysis. Energy, utilities, and real estate sectors have been the most net bought, suggesting a shift toward high-dividend stocks.
Schneller added that this cautious approach could reflect concerns over the impact of potential Fed rate cuts and underlying market volatility. He highlighted that the VVIX, a measure of volatility for the VIX, remains elevated, pointing to high volatility expectations in bond and forex markets.
“Hedge funds may worry that the market’s optimism is premature or that economic conditions could worsen before rate cuts take effect, leading to another downturn,” Schneller said.
Developed market Asia was the second most sold region globally, driven by the largest 10-day cumulative sell-off of Japanese stocks in over five years, triggered by the unwinding of the yen carry trade. Emerging markets in Asia and Europe also experienced net selling, largely due to risk unwinds in China, South Korea, Taiwan, and modest selling in Europe.
“While the surface-level optimism suggests a robust rally, underlying market stress and volatility are keeping hedge funds cautious,” Schneller concluded.
