Investing.com — Hedge funds had a prosperous year in 2024 with average global gains of 12.1%. Long/Short (L/S) equity managers led the way, with several other strategies also generating double-digit returns, according to Goldman Sachs.
This performance occurred against a backdrop of increased market volatility and a rapid rise in long-term rates at the start of the year. Overall gross debt has reached unprecedented levels, propelled by higher short exposure. Over the past month, hedge funds have reduced their net leverage at the fastest pace since mid-2022, implying a more conservative approach. This trend aligns with other sentiment indicators such as the funding gap and results from the recent QuickPoll survey.
Meanwhile, short sales of U.S. exchange-traded funds (ETFs) increased for four straight weeks, marking a 24% month-over-month increase. Shorts on US individual stocks have also increased for 12 consecutive weeks (22 of the last 24) on the Prime portfolio, with no significant episode of de-risking since July of the previous year.
In January, almost all regions recorded net sales, mainly in North America and, to a lesser extent, in Europe. All developed markets (DMs) in Asia experienced net sales, albeit of modest magnitude. In contrast, net flows varied across emerging market (EM) regions. Chinese stocks have seen a slight increase in net allocation in recent weeks, but remain significantly below the five-year averages, sitting in the 14th percentile.
Hedge funds have been significantly withdrawn from the technology, media and media sectors in the United States. Telecom (BCBA:) (TMT) in the second half of 2024. However, recent flows suggest a potential shift in sentiment, with long buying outpacing short selling in recent weeks. So-called “Mag7” stocks now collectively represent around 15.5% of total US net exposure, which is still around the lowest levels since mid-2023 despite peaking at a record 21%. in June 2024.
Healthcare became the most net-bought sector so far in January, boosted by long buying in almost every sub-sector. Sector positioning remains relatively light, with gross and net exposures close to their lowest levels over one year. Within cyclical stocks, this is the sector with the most net purchases at the start of the year, even if net flows have been quite volatile since the American elections. Despite the recent rise in , managers sold energy stocks aggressively to start the year, driven by long selling.
From a factor perspective, hedge funds’ Momentum exposure has seen minimal changes over the past few months, remaining roughly in line with five-year averages. Conversely, factor exposure to market sensitivity, an indicator of appetite for higher beta stocks, has fallen sharply and is now near a five-year low, suggesting a more defensive in early 2025.
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