Morgan Stanley has revealed that computer-driven macro hedge fund strategies initiated a significant stock sell-off on Wednesday, shedding $20bn in equities, with the bank’s prime brokerage desk anticipating an additional $25bn in equity sales over the next week, according to a report by Reuters.
That would mark one of the most substantial risk-unwinding events in a decade.
The massive sell-off was triggered by disappointing earnings reports from major companies like Tesla and Alphabet, which led to a sharp decline in the stock market. The Nasdaq Composite, heavily laden with tech stocks, plummeted 3.6% on Wednesday, experiencing its worst day since October 2022.
“The volatility of the last two weeks started out being very rotational,” Morgan Stanley noted, referencing a recent shift by investors from mega-cap to small-cap stocks. “But that has now morphed into a broad index deleveraging on Wednesday.”
Morgan Stanley warned that continued volatility could accelerate the sell-off, estimating that a further 1% drop in global equities could trigger sales of an additional $35bn, with macro hedge funds potentially offloading up to $110bn if there is a 3% decline in a single day.
On Thursday afternoon, major US stock indexes were in positive territory, buoyed by stronger-than-expected GDP data. Hedge funds however, are increasingly bearish, primarily reducing their long positions—bets that stocks will rise – while maintaining or even increasing their short positions, according to Morgan Stanley.
Portfolio managers have been particularly active in selling shares within the information technology, consumer staples, and materials sectors.
The recent market turmoil has negatively impacted hedge fund performance, although the overall losses were mitigated compared to the broader stock indexes. According to Morgan Stanley, global hedge funds declined by an average of 0.67% on Wednesday. Equity long/short hedge funds in the Americas were the hardest hit, seeing a 1.04% decline.
In comparison, the MSCI All Country World Index fell 1.67%, while the S&P 500 dropped 2.31%.
