Hedge funds are increasing market bets because volatility is making the asset class better
Traders work on the floor of the New York Stock Exchange on September 21, 2022 in New York City.
Michael M. Santiago | Getty Images
High volatility in the market does not cause hedge funds to fall.
The total flow of hedge fund trade, including both long and short bets, has risen for five consecutive weeks and saw the largest hypothetical increase since 2017 last week heading into the Federal Reserve’s interest rate decision, according to major brokerage data from Bolman Sachs. In other words, they are putting money to work in a big way to take advantage of this market volatility for clients, most likely on the sell side.
The industry has been increasing exposure at a time when the Federal Reserve has aggressively raised interest rates to tame decades-old high inflation, raising the prospect of a recession. Even Michael Hartnett of Bank of America described investor sentiment as “without a doubt” the worst since the financial crisis.
“Uncertainty about inflation and tightening could lead to more volatility. This speaks volumes about hedge fund strategies,” said Mark Heffel, CIO of global wealth management at UBS. “Hedge funds have been a rare bright spot this year, with some strategies, such as the macro, doing particularly well.”
Hedge funds gained 0.5% in August, compared to the S&P 500’s 4.2% loss last month, according to HFR data. Some of the big players are outperforming in the chaos of the market. Citadel’s flagship multi-strategy Wellington fund rose 3.74% last month, bringing its performance in 2022 to 25.75%, according to a person familiar with the returns. Ray Dalio’s Bridgewater acquired more than 30% during the first half of the year.
On the short side, hedge funds have not turned excessively bearish despite the challenging macro environment. JPMorgan’s prime brokerage data showed short-selling activity in the community was less active than it was in June, and added selling was more focused on exchange-traded funds than on individual stocks.
“In terms of the amount of HF short selling we’re seeing, it didn’t hit the extremes of June and was more in line with the added longs volume,” JP Morgan’s John Schlegel said in a note on Wednesday. “There seems to be as little appetite for the downside as the money there was earlier this year.”