Hedge funds are treading lightly when it comes to investing in U.S. stocks as September kicks off, historically known as a challenging month for the markets. Even with the possibility of a U.S. rate cut looming, hedge funds have been selling more than buying, according to data from Lipper. This hesitancy is mirrored by more traditional investors who also sold off U.S. stocks in August.
While global stocks are approaching record highs, concerns about sharp selloffs persist. Hedge funds have been particularly cautious, choosing to stay on the sidelines rather than participate in the recent rally. A report by Goldman Sachs reveals that hedge fund leverage, or borrowing, decreased towards the end of August, following a significant drop earlier in the month.
Despite the S&P 500 and MSCI's world stock index closing August at nearly record highs, hedge funds remained cautious and refrained from jumping into the market rally. Data from Goldman Sachs indicates that hedge funds have continued to sell, indicating their more conservative approach.
Data from Morgan Stanley shows that leverage used for trades in the U.S. and Europe dropped by 1% last week, signaling subdued activity from hedge funds. With September historically producing negative returns in U.S. stock markets in half of the last 20 years, hedge funds are being extra careful in their investment decisions.
Market experts have pointed out that systematic hedge fund risk limits may prevent them from taking advantage of future market dips. Seasonally, volatility tends to rise in the autumn months, and there are concerns about the market's ability to absorb any shocks due to stretched positioning in systematic strategies.
Looking ahead, with a U.S. Federal Reserve rate cut anticipated later in September, a sudden flight from stocks is unlikely, according to experts. However, there are potential risks in other markets, such as government bond yields in Japan and Britain reaching multi-year highs, indicating some fragility in the overall market.
While retail investors continue to pour money into U.S. equities, concerns about potential market corrections remain. The high level of direct holdings of retail stock relative to disposable income indicates a powerful yet fragile market bid that could lead to a sharp unwind if there are signs of a growth slowdown. Amidst these uncertainties, Chinese equities saw record net inflows in August, indicating shifting investor sentiments.
