Add professional traders to the ranks of investors bailing out equities as omicron variance anxiety and monetary policy churn the markets.
Hedge funds, which use borrowed money to amplify returns, have shifted away from risk in a significant way just as the S&P 500 endured its biggest two-day decline since October 2020. Net leverage, a measure of risk appetite for The industry that accounts for long versus short fell to a one-year low this week, according to data compiled by Goldman Sachs Group Inc.’s main brokerage.
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The move contrasts with retail traders, who renewed their manic buying after Tuesday’s slide, pushing stocks higher nearly 2% earlier in Wednesday’s session. Then Jerome Powell reinforced his message that the Federal Reserve would keep inflation in check and officials confirmed the first case of the omicron variant in the US That sparked an afternoon selloff that left the S&P 500 with its biggest setback since April 2020.
Few corners of the market were spared as small caps gave up a 2.5% rise to finish lower at more than 2%. Bitcoin fell below $ 57,000, oil hit $ 65 a barrel, and Treasuries rallied on demand for safety. The S&P 500 is down 3.1% in two sessions and more than 4% since its last record on November 18.
The reasons for the mass exodus are varied. Some managers pointed to the collection of tax losses before the end of the year, while others suggested that investors rushed to secure profits in excess of 20%. Front and center is still the Fed’s change of tone.
“We have seen that inflation is more persistent. We have seen the factors that are causing inflation to be more persistent, ”Powell told lawmakers Wednesday after removing the transitory term to describe higher prices a day earlier. The result has been a rush to change the price of assets with the prospect of higher interest rates sooner than investors had anticipated.
Separate data on the positioning of Bank of America Corp. hedge funds showed a similar deleveraging trend. The firm’s hedge fund clients shed more than $ 2 billion in stocks last week, exiting the market at the fastest pace since April.
“Many have mentioned hedge fund pain leading to strange internal movements” among speculative technology stocks, said Dennis DeBusschere, founder of 22V Research. “This latest negative news from omicron prompts us to close the books and move on.”
Professional managers tend to sell faster due to pressure to generate returns, according to Mark Freeman, chief investment officer at Socorro Asset Management LP. After their concentrated bets on expensive tech stocks flopped last week, hedge funds now face a quick-closing window to fuel a year of uneven performance.
That risk aversion likely underscored the latest slide in unprofitable tech stocks, a group that typically sells out when long-term Treasury yields rise. On Wednesday, however, 10-year yields fell and a basket of extremely expensive Goldman software stocks tumbled 7.1%.
“There is a certain element of trying to preserve performance throughout the year, rather than seeing it disappear here in the later weeks of the year,” Freeman said by phone. “It was just assumed that we would have this end of the year rally. And as soon as that is called into question, you will see a lot of repositioning. ”
Speculative names were hit the hardest by Wednesday’s sale. The Renaissance IPO (ticker IPO) ETF, which tracks recent initial offerings, and many have yet to make any money, fell 6.8%, the most since March 2020. Cathie Wood, a fan of growing stocks, saw that its flagship ARK Innovation (ARKK) ETF fell 6.7% to a one-year low.
The concern was also obvious among exchange-traded funds. After attracting about $ 10 billion of fresh money during Friday’s carnage, equity-focused ETFs posted withdrawals totaling $ 1.6 billion on Tuesday, data compiled by Bloomberg shows.
“It’s a pretty good indicator of how fragile sentiment is right now,” Freeman said. “So you see it doesn’t take much to finish.”
© 2021 Bloomberg