Hedge funds ramp up market bets as volatility brings the asset class back into favor


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

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The excessive market volatility is just not inflicting hedge funds to back down.

Hedge funds’ whole gross trading stream, together with each lengthy and quick bets, rose for 5 weeks in a row and had the largest notional enhance since 2017 final week heading into the Federal Reserve’s charge resolution, based on Goldman Sachs’ prime brokerage knowledge. In different phrases, they’re placing cash to work in an enormous option to capitalize on this market volatility for purchasers, doubtless principally from the quick facet.

The business was dialing up publicity at a time when the Fed rushed to hike rates of interest aggressively to tame decades-high inflation, elevating the odds for a recession. Bank of America’s Michael Hartnett even known as investor sentiment “unquestionably” the worst since the financial disaster.

“Uncertainty over inflation and tightening policy may spur more volatility. This speaks to hedge fund strategies,” mentioned Mark Haefele, world wealth management CIO at UBS. “Hedge funds have been a rare bright spot this year, with some strategies, like macro, performing particularly well.”

Hedge funds gained 0.5% in August, in comparison with the S&P 500’s 4.2% loss final month, based on knowledge from HFR. Some massive gamers are excelling in the market chaos. Citadel’s multistrategy flagship fund Wellington rallied 3.74% final month, bringing its 2022 efficiency to 25.75%, based on an individual aware of the returns. Ray Dalio’s Bridgewater gained greater than 30% by way of the first half of the yr.

On the quick facet, hedge funds did not flip overly bearish regardless of the robust macro surroundings. JPMorgan’s prime brokerage knowledge confirmed the group’s shorting exercise has been much less energetic than in June, and shorts added have been extra targeted on exchange-traded funds than single shares.

“In terms of how much HF shorting we see, it’s not reached the extremes of June and it has been more in line with the magnitude of longs added,” JPMorgan’s John Schlegel mentioned in a Wednesday word. “It seems there’s a lack of willingness to get as extremely bearish as funds were earlier this year.”

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