Uncertainty, both political and economic, was a key theme in May, as elections in Greece and Turkey, an unusual period of calm in Italian politics, and a subdued ‘rebound’ in China’s economy, coupled with brinksmanship over the US debt ceiling, and question marks over the direction of central banks’ interest rate policies, all contributed to another month of market instability.
- Tech stock rally provides profit potential as Nvidia soars
- UHNWs favouring hedge funds again but new launches stall
- Hedge fund stock borrowing hits record levels as costs fall
By Mark Kitchen
Head of intelligence. Hedgeweek
Uncertainty, both political and economic, was a key theme in May, as elections in Greece and Turkey, an unusual period of calm in Italian politics, and a subdued ‘rebound’ in China’s economy, coupled with brinksmanship over the US debt ceiling, and question marks over the direction of central banks’ interest rate policies, all contributed to another month of market instability.
Hedge funds upped their short wagers against Greek government bonds to the highest level seen since 2014 on the back of the possibility of a period of post-election political paralysis – fears that were partly justified when no party won an overall majority with the ruling New Democracy Party opting to seek additional seats in a second poll on 25 June.
A period of uncharacteristic political calm across the Ionian Sea in Italy, meanwhile, combined with unexpectedly strong economic performance, had hedge funds rushing to unwind their short positions in government bonds and cut their losses on bets against the heavily indebted country.
Cutting short bets was also the name of the game in the metals market last month, with weak demand from the world’s top copper consumer China sending prices tumbling and bearish positions soaring mid-month. The London Metals Exchange (LME) reported net short hedge fund positions in the bellwether metal for the first time in three years as long bets hit their lowest level in seven months.
Ultra-wealthy investors meanwhile, seem to have rediscovered a liking for hedge funds as protection against global macroeconomic uncertainty with UBS Group revealing that its family office clients upped their allocations to the asset class significantly, to 7% last year, almost double the level seen in the previous year. In another vote of renewed UHNW confidence, 50% of family offices are now invested in hedge funds, up from 43% previously.
On the face of it, that increase in popularity seems at odds with news from Preqin that new hedge fund launches have slumped to their lowest level since 2017, but investors are clearly putting their faith in established managers rather than newcomers as they seek shelter from on-going market volatility and macroeconomic uncertainty.
In terms of ‘sure bets’, US tech stocks have been centre stage, with a host of big name managers putting their faith in big-name companies. Arrowstreet Capital LLC, D1 Capital Partners and Coatue Management LLC were among the prominent hedge funds that acquired shares of Facebook parent Meta Platforms Inc during the first quarter of the year, while Bill Ackman’s Pershing Square built a new $1.1 billion stake in Google parent Alphabet.
The tech stock rally has also provided profit potential for several funds with Jennison Associates and Steve Cohen’s Point72 among those thought to have benefited from a surge in the stock price of chip-maker Nvidia. In Jennison’s case, Market Insider said that regulatory filings suggest the firm could have racked up a gain of up to $5.2 billion as Nvidia’s share pierce soared over the first five months of the year.
Big increases – of the interest rate kind – have been a key tactic in the battle by central banks to curb rampant inflation, but have also added to the uncertain macroeconomic picture and provided hedge funds with challenges and opportunities in almost equal measure. Early in the month, data from the Commodity Futures Trading Commission (CFTC) pointed to an uptick “in basis trading activity” with leveraged funds establishing large net short positions across several US Treasury futures contracts, including a record short in the 10-year note.
Subsequent CFTC data indicated that hedge funds had also flipped net long on Secured Overnight Financing Rate (SOFR) futures contracts for the first time in over a month, perhaps in preparation for an anticipated end to the US Federal Reserve’s programme of interest rate hikes.
Those ‘inflation-busting’ rate rises, which have made it cheaper for speculators to borrow stock and bet on movements in company stock prices, helped hedge fund industry borrowing to record highs last month, according to Goldman Sachs, although the bank also said funds remain undecided overall on market direction due to – you guessed it – “macroeconomic uncertainty”…
