(April 27): Hedge funds are using the US equity rally to reduce risk, according to traders on Goldman Sachs Group Inc’s prime brokerage desk.
As a rapid rebound in the S&P 500 Index drove the benchmark to a record high last week, hedge funds were cutting the total size of their long and short positions in equities by the most since September last year, analysis from the Goldman team led by Vincent Lin shows.
“US long-short gross leverage fell 4.6 percentage points last week, as US equities saw the largest notional de-grossing in seven months, led by risk unwind in single stocks,” they said in a client note.
The latest bounce in the S&P 500 is one of its sharpest in history, from a technical standpoint. The equity gauge swung from being oversold, as measured by its 14-day relative strength index, to being overbought in just 12 days.
The stalemate in US-Iran peace negotiations, a shift in markets from focusing on geopolitics to strong earnings growth, has attracted some investors back to stocks. Systematic strategies that use algorithms and mathematical models, like CTAs, have bought stocks aggressively, while investors more focused on fundamental drivers seem to have less conviction.
The unwinding of risk last week was broad, as nine out of 11 sectors were net sold. Hedge funds net sold consumer discretionary stocks for a seventh straight week and at the fastest pace in 10 weeks, driven almost entirely by long sales.
Information technology stocks were also in the spotlight, with the sector experiencing its largest weekly de-grossing since July 2024. It was the third-largest reduction in overall positioning in the last five years, driven by long sales outpacing short covers by 1.9 to 1.
Still, exposure to the sector remains very high, even after last week’s selling. Gross allocation to tech is 20.6% of total US overall market value, in the 92nd percentile of the past year and the 98th percentile compared with the past five years.