Hedge funds increase market bets as volatility drives asset class back into favor

Traders work on the floor of the New York Stock Exchange on September 21, 2022 in New York City.

Michael M. Santiago | Getty Images

Extreme market volatility is not causing hedge funds to retreat.

Hedge funds’ total gross trading flow, including long and short bets, has increased for five straight weeks and posted the largest notional increase since 2017 last week ahead of the Federal Reserve’s rate decision, according to the Goldman Sachs prime brokerage data. In other words, they are putting a lot of money to work to take advantage of this market volatility for clients, probably mostly on the short side.

The industry was increasing its exposure at a time when the Fed rushed to raise interest rates aggressively to tame decades-high inflation, increasing the chances of a recession. Bank of America’s Michael Hartnett even called investor sentiment “unquestionably” the worst since the financial crisis.

“Inflation uncertainty and policy tightening can drive volatility. That says a lot about hedge fund strategies,” said Mark Haefele, global CIO of wealth management at UBS. “Hedge funds have been a rare beacon of hope this year, with some strategies, such as macro, performing particularly well.”

Hedge funds gained 0.5% in August, compared to 4.2% for the S&P 500 last month, according to HFR data. Some big players excel in market chaos. Citadel’s flagship multi-strategy fund, Wellington, rebounded 3.74% last month, taking its 2022 performance to 25.75%, according to a person familiar with the returns. Ray Dalio’s Bridgewater gained more than 30% in the first half of the year.

On the short side, hedge funds were not overly bearish despite the difficult macroeconomic environment. Prime brokerage data from JPMorgan showed that community short selling activity was less active than in June, and added shorts were more biased towards exchange-traded funds than individual stocks.

“In terms of the amount of HF shorts we see, it hasn’t hit the extremes of June and it’s been more in line with the magnitude of the added longs,” JPMorgan’s John Schlegel said in a Wednesday note. . “There seems to be an unwillingness to go as extremely bearish as the funds were earlier this year.”

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