Hedge funds are entering September with a defensive stance on US equities, keeping leverage muted and avoiding the latest market rally despite expectations of a Federal Reserve rate cut later this month, according to a report by Reuters citing research from Goldman Sachs and Morgan Stanley.
Managers were net sellers of stocks in August, with Goldman noting that hedge funds “did not participate” in the S&P 500’s 2% gain last month. Morgan Stanley data show leverage in both the US and Europe declined again in the final week of August, reinforcing the cautious tone.
Seasonal risks also weigh on positioning. September has historically been one of the weakest months for equities, with corporate buybacks constrained by regulation, while systematic strategies are already near risk limits, leaving markets more vulnerable to volatility.
Some hedge funds are also flagging broader fragilities, with Porchester Capital CIO Omar Sayed warning that surging government bond yields in Japan and the UK could transmit stress across markets, echoing the 2024 sell-off sparked by a surprise Bank of Japan hike.
Retail exposure adds another risk factor: UBS estimates direct US equity holdings will reach 265% of disposable income this year, raising concerns that a slowdown in household sentiment could trigger a sharp unwind.
Meanwhile, hedge funds appear to be rotating capital toward Asia, with Goldman Sachs reporting record inflows into Chinese equities in August, marking the heaviest buying spree since February.
