Hedge funds remained net sellers post-Fed, says JPMorgan

Investing.com -- Hedge funds (HFs) remained net sellers in the aftermath of the Federal Reserve's rate cut, JPMorgan revealed in a recent report.

Despite expectations of a change in market behavior, the selling pressure that began before the Fed's announcement persisted throughout the week.

Hedge funds were net sellers with a -1.3z score in the past five days, indicating continued de-grossing even after the Fed’s first interest rate reduction in years. Gross and net leverage levels among funds were largely unchanged week-over-week.

“For all the anticipation/speculation as we approached the start of the easing cycle in the US, very little seems to have changed in terms of investor behavior,” JPMorgan’s note states.

Retail investor activity remained subdued, with muted single-stock flows and minimal changes in exchange-traded fund (ETF) activity. In the options market, the call/put ratios turned modestly positive, and futures saw some buying activity.

Selling in the U.S. tech sector resumed, with HFs particularly targeting the ‘Magnificent 7’ stocks and Tech Hardware, according to the report.

“Mag7 flows continue to be choppy as it seems HFs are looking to trade it tactically (buying dips in both early Aug and early Sep and selling rallies subsequently) and long/short ratio somewhat neutral at ~60th %-tile,” the note writes.

Meanwhile, retail investor flows in Nasdaq 100 stocks have started to recover from recent lows, alongside a rise in retail call option volumes. Both metrics had peaked in July with the surge in Tech, AI, and Crypto stocks, and a rebound in retail flows could provide support for the tech sector going forward, JPMorgan points out.

Outside the U.S., hedge fund flows were mixed. European hedge funds continued to sell Consumer Discretionary and Industrials for a second consecutive week. Meanwhile, defensives like Household & Personal Products, Telecom, and Utilities were also sold off amidst underwhelming performance in these sectors.

In Asia, however, the picture was different. Hedge funds reversed their earlier selling trends, especially in China, Taiwan, and Hong Kong stocks, which saw significant buying. In contrast, South Korea experienced minor net selling, while Japan's flows remained neutral.

Globally, funds have added more shorts than longs over the past four weeks, with short flows at +1z and long flows at -0.5z. But overall, hedge fund performance has seen some recovery in the past week, particularly in Equity Long/Short funds.

Looking ahead, the bank does not believe current positioning will prevent a continued rally in the markets. However, the near-term outlook remains mixed due to factors such as a lack of enthusiasm from hedge funds, muted seasonality, and some mixed data points from the past week.

“Ultimately, we still think dips probably get bought if the macro backdrop remains supportive and history suggests a likelihood of further gains into year-end,” JPMorgan said.

Source: Investing.com