July proved to be a good month for stocks and oil, giving US hedge fund managers plenty to celebrate way beyond Independence Day as they wasted no time in taking advantage of opportunities created by the continued rally in both share prices and price increases across the energy complex.
- Managers scramble to dump short positions
- Dollar sentiment turns negative, sterling positive
- Oil bets pivot from bearish to bullish
By Mark Kitchen
Head of Intelligence, Hedgeweek
July proved to be a good month for stocks and oil, giving US hedge fund managers plenty to celebrate way beyond Independence Day as they wasted no time in taking advantage of opportunities created by the continued rally in both share prices and price increases across the energy complex.
The S&P 500 has rallied a remarkable 20% in the first seven months of the year to stand just 200 points or so short of its all-time high, with technology and AI-related stocks leading hedge fund gains through June and into July.
Several Asia-based hedge funds meanwhile, benefited from bets on shares in AI-related companies, plus wagers on the wider Japanese and US stock markets, to outperform their wider peer group in the first half of the year and into July.
China stocks too, proved a draw for hedge fund managers with net purchases of Chinese stocks accelerating to the highest pace seen in nine months, according to data from Goldman Sachs’ prime brokerage business. The July buying spree came as the Beijing government laid out pro-growth plans to stimulate economic growth in the world’s second largest economy, including making further interest rate cuts, and by speeding up the issuance of infrastructure bonds, and loosening property policies.
Back in the US, by the middle of the month, and with returns lagging the MSCI, managers were dumping short positions at the fastest pace seen since January as bets on a recession continued to falter and the prospect of a ‘soft landing’ for the US economy became more likely.
Hedge funds exited negative wagers aimed at specific energy, financials, and healthcare names, though food and drink, IT and real estate companies saw an uptick in shorting activity. And while 60% of the trades that were abandoned were in US stocks, hedge funds also ditched bets on so called macro products, related to how currencies, commodities and bonds react to the broader economic environment.
With the US Federal Reserve seemingly nearing the end of its current programme of interest rate hikes, hedge funds swung to an overall bearish dollar position for the first time since March, according to data from the US Commodity Futures Commission.
Across the pond meanwhile, with UK inflation remaining stubbornly high and the Bank of England seemingly having further to go in terms of interest rate hikes than the Fed, sentiment towards sterling moved in the opposite direction. Hedge fund managers and other currency speculators upped their bullish bets on the pound to the highest level in nine years, despite signs that the currency’s strong rally so far this year is flagging.
In energy markets, managers began the month “exceptionally bearish on crude oil” on the back of a continuing slowdown in economic growth in Europe and China, and the apparent failure of production cuts from Saudi Arabia and its OPEC⁺ allies to lift prices.
By mid-month though, and with Saudi Arabia having extended its voluntary output cut, managers were enticed back into the market, with purchases of the six most important petroleum futures and options contracts over the seven days up to the end of 11 July totalling the equivalent of 115 million barrels, marking one of the largest weekly increases in the last ten years.
And by month end, a wider rally in prices across the energy complex, which saw crude climb above $80 a barrel and petrol prices surge to multi-month highs, saw hedge funds up their bullish bets further. Net long positions in the two benchmark crude futures reached a three-month high, while long-only bets in US gasoline futures surged to about 89,278 lots in the week ending 25 July, the highest in nearly two years.
