Hedge Funds Kept Buying the Dip in Stocks Amid Last Week’s Rout
Amid the worst equity sell-off in more than a decade, one group of traders apparently refused to give in.
(Bloomberg) -- Amid the worst equity sell-off in more than a decade, one group of traders apparently refused to give in.
Hedge funds that make both bullish and bearish equity bets bought the dip last week as the market plunged into a correction. Their purchases got more frenetic than any time in more than two years on Thursday, when the S&P 500 dropped 4.4%, according to data compiled by Morgan Stanley’s prime brokerage unit.
The boldness contrasted with retail investors and trend-following traders, who quickly bailed out of stocks as the rapid spread of coronavirus sent benchmarks tumbling. The willingness to go against the trend and pick the bottom may reflect a view that managers see value emerging during the carnage. It may also help explain why stocks are quickly bouncing back.
The sell-off “did not cause hedge funds to shy away as they were fairly large net buyers,” Morgan Stanley wrote in the note to clients Friday. “Funds have continued to keep their skin in the game.”
Stocks staged a rousing comeback Monday, with the S&P 500 surging 4.6% amid optimism that central banks will coordinate to fight the economic threats from the coronavirus.
Hedge fund stock pickers jacked up risk last month, just before the rout. Their net leverage, a measure of industry risk appetite that takes into account long versus short positions, rose by about 5 percentage points in early weeks of the month, one of the fastest expansions in years, Morgan Stanley’s data showed.
The sell-off didn’t hurt their performance much, however, as their favorite stocks performed in line with the market and the short positions added to gains when they fell. Long-short funds tracked by Morgan Stanley were down 1.9% in February through last Thursday, compared with a drop of almost 8% for the S&P 500.
Amid better returns, they snapped up technology shares last week, in particular software makers, according to Morgan Stanley. Fund managers were also net buyers of airlines, hotels and restaurant stocks, those that borne brunt of coronavirus-induced selling.
Net leverage fell last week, mostly driven by a market decline and an increase in index put options, according to Morgan Stanley. One looming risk, the firm says, is the industry’s lofty gross leverage, which tracks the total of long and short positions. At 190%, the reading stood at the 86th percentile of a range since 2010. While the elevated exposure signals a high level of confidence in stock bets, it can bring trouble should the market turmoil persist, forcing money managers to unwind positions.
“If volatility continues, the open question remains: if/when will the hedge funds have to start actively de-grossing?” Morgan Stanley wrote.
To contact the reporters on this story: Lu Wang in New York at lwang8@bloomberg.net;Melissa Karsh in New York at mkarsh@bloomberg.net
To contact the editors responsible for this story: Courtney Dentch at cdentch1@bloomberg.net, Chris Nagi, Richard Richtmyer
©2020 Bloomberg L.P.