Investing.com -- Hedge funds experienced a prosperous year in 2024 with average global gains of 12.1%. Equity Long/Short (L/S) managers were the frontrunners, with several other strategies also yielding double-digit returns, according to Goldman Sachs.
This performance happened in the context of increased market volatility and a swift rise in long-term rates at the onset of the year. The overall Gross leverage climbed to unprecedented levels, propelled by higher short exposure. In the past month, hedge funds have trimmed Net leverage at the swiftest rate since mid-2022, implying a more conservative approach. This trend aligns with other sentiment indicators such as the funding spread and recent QuickPoll survey findings.
Concurrently, US Exchange-Traded Fund (ETF) shorts have grown for four continuous weeks, marking a 24% month-over-month increase. US single stock shorts have also risen for 12 successive weeks (22 out of the last 24) on the Prime book, with no significant de-risking episode since July of the previous year.
In January, nearly all regions have seen net selling, predominantly in North America and, to a lesser degree, Europe. All Developed Markets (DM) in Asia have experienced net selling, albeit modest in magnitude. In contrast, net flows have varied across Emerging Market (EM) regions. Chinese stocks have seen a slight increase in net allocation over the past few weeks, but remain substantially below the five-year averages, sitting in the 14th percentile.
Hedge funds significantly rotated out of US Technology, Media, and Telecom (BCBA:TECO2m) (TMT) stocks in the second half of 2024. However, recent flows suggest a potential shift in sentiment, with long buys surpassing short sales in recent weeks. The so-called "Mag7" stocks now collectively account for approximately 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.
Health Care has emerged as the most net bought sector so far in January, spurred by long buys across nearly all subsectors. Sector positioning remains relatively light, with Gross and Net exposures both near one-year lows. Within Cyclicals, Financials is the most net bought sector at the start of the year, although net flows have been quite volatile since the US elections. Despite the recent surge in crude oil, managers have aggressively net sold Energy stocks to start the year, driven by long sales.
From a factor perspective, hedge funds' Momentum exposure has seen minimal changes in recent months, remaining roughly in line with five-year averages. Conversely, factor exposure to Market Sensitivity, an indicator of appetite for higher beta stocks, has plummeted sharply and is now near five-year lows, suggesting a more defensive stance in early 2025.
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