Friday, January 28

Hedge funds flee the market after omicron and Powell

The turbulence unleashed in the markets after the irruption of the omicron variant of coronavirus and the more aggressive turn of Jerome Powell with the withdrawal of monetary stimuli, caused the massive flight of the ‘hedge funds’.

Unlike retailers, who bought into market downturns this week, professional investors fled the risk just as the S&P500 it endured its biggest drop in two days since October last year.

Used to investing with borrowed money, the net leverage ratio measures the risk appetite of the hedge fund industry.

This indicator is rebuilt taking into account long and short positions. The news is that this week it plunged to a one-year lows, according to data compiled by Goldman Sachs.

The movement of hedge funds contrasts with the rise of 2 percent that came to mark the S & P500 this Wednesday.

Subsequently, the US selective collapsed after the first omicron case was detected in the United States, but hedge funds had already taken cover.

Flight to the shelters

Few parts of the market dodged a sell-off the pros saw coming. The values ​​of the Nasdaq They closed 1.8 percent lower, while small caps cut 2 percent. In addition, the bitcoin fell to the edge of $ 57,000.

By contrast, bond yields moved higher as investors demand increased security, and so did the Japanese yen.

The same did not happen with the dollar. Hedge funds lowered their bullish bets on the greenback for the fourth week in a row, with their net long dollar positions down a third from their October levels.

Concern about the omicron variant offset the Fed’s more aggressive tone, reinforcing the yen as the main safe-haven currency.

Since the highs of November 18, the S & P500 corrected around 4 percent, while the Nasdaq dropped 4.6 percent.

The only classic safe haven that maintained a more subdued performance was gold, which rose just 0.4 percent. “There is no sign that it is a haven from the volatility of the virus,” said the Oanda analysts.

Why are hedge funds fleeing the market?

There are different reasons to explain the massive exodus of hedge funds. Market sources justified it by the need to make tax losses before the end of the year.

Other experts, however, pointed out that it was only a collection of profits in the face of a more hostile environment and when the bags had rises higher than 20 percent before they were posted.

And then the Powell factor also comes into play, especially his warning that inflation is a persistent phenomenon.

The result was an abrupt move by professional investors to undo positions as they anticipated a rise in interest rates earlier than expected.

Data on the positioning of Bank of America hedge funds showed similar trends in deleveraging.

Its clients of these funds liquidated positions for 2 billion dollars in the week, the fastest pace of exit from the market since April.

Pressure to generate returns

The truth is that these professional investors rarely wait for the storm to subside. They tend to sell faster than the rest of the market “due to pressure to generate returns,” said Mark Freeman, chief investment officer at Socorro Asset Management.

After their bets on big tech floundered last week, hedge funds decided to take advantage of this window of fast-closing positions to try to straighten out an uneven year, the same sources said.

The aversion to risk has its logic, and the flight of the technology sector also. In a context of rising interest rates, the large companies in the Nasdaq, much more indebted, they are also more sensitive to the increase in the price of money.

It’s about preserving profits for the year first, rather than watching them vanish in a matter of days, Freeman said. In his view, professional managers had assumed there would be a rally down the stretch, but when the hikes were called into question, there was a lot of portfolio repositioning.

Some illustrious market funds noted these bearish market lunges. For example, the background Renaissance IPO ETF plummeted more than 6 percent, the same fall as Cathie Wood’s ARK Innovation ETF.

In Feeman’s view, all of these moves by professional investors reveal just how fragile market sentiment is right now.