Digital Assets Report


Like this article?

Sign up to our free newsletter

Month in review: Hedge funds turn bearish as US stock market stalls in August

Related Topics

  • Managers up short bets as US stock market stalls
  • Exposure to Magnificent Seven hits record level
  • Bei blames foreign funds for China’s stock market rout

By Mark Kitchen
Head of Intelligence, Hedgeweek

August has a reputation as being something of a tough month for equities markets when lower trading volumes as traders and investors go on holiday, coupled with profit taking ahead of the traditional dog days of September, combine to constrain gains, and this year was no exception as both the S&P 500 and Nasdaq-100 Indices posted their first monthly declines since February.

Long-short hedge fund managers were seemingly ahead of the game having unwound bearish bets in both their long and short books by the end of July, according to data from Goldman Sachs’ prime brokerage division.

Michael Burry meanwhile, famed for his winning wagers against the US housing market ahead of the 2008 global financial crisis as depicted in ‘The Big Short’ book and film, with 13-F regulatory filings revealing that his hedge fund firm, Scion Asset Management, had placed bets worth over $1.6bn against both the S&P 500 and Nasdaq 100.

Having scrambled to unwind their bullish stock market bets in late July and early August, hedge funds upped their short wagers mid-month, with Goldman Sachs data showing that at the August midpoint, the dollar amount of bearish wagers was more than double the volume of positions covered in the whole of July.

A mid-month uptick in short sales was also reported by Morgan Stanley’s securities lending desk, particularly among single stocks, as the firm recorded the second- and fourth-busiest sessions of the year so far.

Stock sentiment wasn’t all bearish however with the so called “Magnificent Seven” of Apple, Microsoft, Alphabet, Amazon, Nvidia, Tesla, and Meta Platforms – which collectively were responsible for over 75% of the Nasdaq 100’s gains in 2023 up to the end of July – continuing to attract attention as hedge funds upped their exposure to the highest level ever seen.

The bond markets also saw a flurry of August activity as Fitch Ratings downgraded the US government’s credit rating by a notch from AAA to AA+ at the beginning of the month on the back of an increase in federal, state, and local debt levels and what it described as a “steady deterioration in standards of governance” over the past two decades.

Coupled with a growing view that interest rates my stay higher for longer than previously expected, the downgrade helped push yields from below 4% to as high as 4.35% at one point and prompt hedge funds to up their short positions in US Treasuries, increasing their divergence from asset managers who remained on the long side of the trade, according to a Treasury client survey by JP Morgan.

By month end, hedge funds were seemingly back in basis trade business, as short sales of US Treasury futures surged. Data from the US Commodity Futures Trading Commission revealed that hedge fund short positions had risen to over six million 10-year-note futures equivalents, with asset managers net long by a smiler amount.

Away from the US, Chinas economy continued to struggle, with the decision by several US hedge funds including Coatue, D1 Capital and Tiger Global to cut their exposure to Chinese companies in Q2, prompting Li Bei one of the country’s top macro hedge fund bosses to blame “foreign funds” for an August stock market rout which saw Chinese domestic stocks sink to their lowest levels since November,

Taken together, they are a bunch of aimless flies,” she said in an article posted on Chinese social media platform WeChat.

Like this article? Sign up to our free newsletter

Most Popular

Further Reading