4 months ago • 2 mins
In 2023's confusing markets, stock-picking hedge funds are starting to see the potential risks outweigh the potential gains – and they’re starting to pull back as a result. According to JPMorgan, hedge funds that go both long and short on stocks heavily slashed positions on both sides of their book last week, in a process called “de-grossing”. Morgan Stanley’s hedge fund clients also followed a similar pattern of risk reduction, with their de-grossing activity last week at its highest so far this year. Goldman Sachs's fund clients, meanwhile, trimmed positions in 12 of the past 14 trading sessions.
See, rather than sinking like most forecasters predicted, the S&P 500 has been up in all but two months since last October, climbing 28% over that stretch. While the equity rally may be favorable for those with long positions in the market, it's been challenging for hedge funds with short positions, leading them to broadly throw in the towel in the form of de-grossing. You can see this in the graph above, with a price index of Goldman Sachs’s basket of most-shorted stocks surging last quarter (red line).
But as investors chase the rally, some are wondering whether the sentiment pendulum has swung too far in the other direction. After all, retail investors are back with their love affair for meme stocks, while traders are rushing to buy call options) so they can play the upside. And according to the latest poll by the National Association of Active Investment Managers, stock exposure has just shot to its highest level since November 2021. You’d think that’d have at least some people on edge. But few investors seem worried enough to hedge: the cost of buying protection against dips in the options market is cheaper than it’s been since 2008. So amid all the fervor, it might be worth remembering Warren Buffett’s sage advice: “be fearful when others are greedy, and greedy when others are fearful”. Tread wisely…
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