News
Macro hedge funds to dump $45 billion into stocks, Morgan Stanley says
By Carolina Mandl
NEW YORK (Reuters) – Computer-driven macro hedge fund strategies sold $20 billion worth of stocks on Wednesday and are expected to lose at least another $25 billion next week after stocks plunged in one of the biggest risk-off events in a decade, Morgan Stanley said in comments to institutional clients on Thursday.
After disappointing earnings reports from Tesla and Alphabet, investors dumped stocks heavily on Wednesday, with the tech-heavy Nasdaq Composite falling 3.6% in its worst day since October 2022.
“The volatility of the past two weeks started out very rotational,” the bank said, referring to a recent rotation of investors from mega caps to small caps. “But that has now turned into a broad index deleveraging (on Wednesday).”
If volatility persists in the coming days, the selloff would escalate quickly, Morgan Stanley said in its commentary, declining to comment further. An additional 1% drop in global stocks could trigger $35 billion in selling, and macro hedge funds could dump as much as $110 billion on a 3% one-day drop.
Major U.S. stock indexes were positive Thursday afternoon after stronger-than-expected GDP data.
James Koutoulas, chief executive of hedge fund Typhon Capital Management, told Reuters that even after Wednesday’s sell-off, momentum stocks continue to trade above their intrinsic value. Historically, he said, interest rate hikes have been followed by economic downturns.
“It appears investors are betting on bucking this trend,” he said in a note to clients.
Hedge funds are becoming more bearish as they are mainly reducing their long positions, or bets that stocks will rise, while maintaining, and in some cases increasing, bets on stocks they believe will fall, according to Morgan Stanley.
Portfolio managers primarily sold stocks in the information technology, consumer staples and materials sectors.
Goldman Sachs also said its clients increased short positions in so-called macro products such as corporate and large-cap bond exchange-traded funds (ETFs).
PERFORMANCE
After the market bloodbath, hedge fund performance ended Wednesday in the red, although overall they managed to reduce losses compared to major stock indexes.
Global hedge funds fell 0.67% on average, according to Morgan Stanley, with long/short equity hedge funds in the Americas posting the biggest declines at 1.04%.
The MSCI All Country World fell 1.67% on Wednesday, while the S&P 500 fell 2.31%.
“Hedge funds are in the midst of the worst drawdown of a positive year,” said Mario Unali, head of investment advisory at Kairos Partners.
The story continues
(This story has been corrected to fix James Koutoulas’ comments to reflect what he said in paragraph 6: the stock continues to trade above its intrinsic value, not overweight.)
(Reporting by Carolina Mandl in New York; Editing by Diane Craft)