Hedge funds saw a successful year in 2024, achieving average global gains of 12.1%. Equity long-short managers led the way, with several other strategies delivering double-digit returns, according to a report by Investing.com citing data from Goldman Sachs.
This performance unfolded amid heightened market volatility and a sharp rise in long-term rates early in the year. Gross leverage reached record highs, driven by increased short exposure. However, in the past month, hedge funds reduced Net leverage at the fastest pace since mid-2022, reflecting a shift toward caution. This aligns with other sentiment indicators, such as funding spreads and findings from recent QuickPoll surveys.
Short positions in US Exchange-Traded Funds have risen for four consecutive weeks, up 24% month-over-month. US single-stock shorts have climbed for 12 straight weeks (and 22 of the past 24), with no significant de-risking since July 2023.
January saw net selling across most regions, particularly in North America and Europe. Developed Markets (DM) in Asia also experienced modest net selling. Emerging Market (EM) regions showed mixed flows, with Chinese equities seeing slight net increases but remaining well below five-year averages, in the 14th percentile.
Hedge funds rotated out of US Technology, Media, and Telecom (TMT) stocks in late 2024, but recent data suggests a shift in sentiment, as long buys now outpace short sales. The “Mag7” stocks currently account for about 15.5% of total US Net exposure, down from a record 21% in June 2024, but slightly recovering from mid-2023 lows.
Health Care has been the most net bought sector in January, driven by strong long buying across subsectors, despite overall light positioning and near one-year lows in Gross and Net exposures. Within cyclicals, Financials emerged as the most net bought sector early in the year, though net flows have been volatile post-US elections. Energy stocks, despite rising crude oil prices, have been aggressively net sold due to long sales.
From a factor perspective, Momentum exposure remains stable and aligned with five-year averages. However, exposure to Market Sensitivity – an indicator of preference for higher beta stocks – has dropped sharply to near five-year lows, reflecting a defensive hedge fund stance in early 2025.
