On May 20, the S&P 500’s intraday losses intensified, and it was just one step away from falling into a bear market. To the market’s surprise, the S&P 500 rallied in the last hour of trading in a liquidity vacuum, closing back above 3,900. This is also the third time in the past week that the S&P 500 has narrowly avoided falling into a bear market (that is, a drop of more than 20% from its all-time high in January, the watershed is about 3855 points.)

The reason the S&P 500 has avoided disaster again is that whenever short positions surge, there is a short run in the market. How do we know if the shorts are accumulating to the point where a slight bounce is enough for a run? From Goldman Sachs prime brokerage data, we can obtain the following information:

1. On the same day, U.S. stocks saw their first net selling in four days, with a long-short ratio of 1:2.5

2. On Wednesday (May 18), prime brokerage business data showed that the shorting ratio was relatively low compared to the 4% drop in the S&P, indicating that hedge fund shorting was not the reason for the plunge on the day, but it also showed that they had already sold a lot of shorts before the plunge. .

3. At the same time, the quantitative indicators of the Goldman Sachs research team also show that retail investors have also been short in the past few months, reversing the 26% increase in net buying positions accumulated since January 2019.

Goldman Sachs found that both individual stocks and macro categories (indices and ETFs) saw net selling, accounting for 67% and 33%, respectively. Individual stocks had the largest net selling last month, with 9 out of 11 sectors net selling, with the worst being information technology, telecom services, industrials, healthcare and materials.

Not that hedge funds don’t want to make money, consumer discretionary and staples were the worst performers on Wednesday, but both saw net buying in prime brokerage, helped by long buying and short covering, respectively.

On the other hand, the long-frustrated information technology sector was a net sell for the second day in a row, following a streak of net buys from May 10 to May 16. In the past month, the information technology sector recorded the largest net selling amount due to short selling and long selling.

The red line in the chart below shows that U.S. stock shorts have reached the highest level since 2022, which further illustrates the spread of bearish sentiment in the current market.

Hedge funds are accelerating their shorting, which explains the recent rise in the VIX volatility index and the slump in stock prices. Short positions rose, and hedge funds’ gross and net exposure fell. Data from Goldman Sachs shows that leverage has fallen by an all-time high.

But Tony Pasquariello, head of hedge fund sales at Goldman Sachs, said that in only 36 of the past 15 years, the VIX volatility index has not been as low as Wednesday. Again, short selling has already begun.

Here are five highlights from Goldman’s quarterly Hedge Fund Tracker:

1. Stock market performance

So far in 2022, both Alpha and Beta have created significant headwinds for hedge fund earnings. The S&P 500 had its worst start to the year since 1932, making Beta even more challenging. On the Alpha side, since the beginning of 2021, the Goldman Sachs hedge fund VIP list of the most popular stocks (GSTHHVIP) has underperformed the S&P 500 by 28 basis points, the worst performance in history.

Hedge fund shorting has been smoother, with stocks with the most short positions down 31% so far this year, underperforming the S&P 500 and GSTHHVIP. The median short position in the S&P 500 was 1.5% of its market value, a 25-year low.

2. Leverage and capital flow

Hedge funds’ net leverage began to decline in 2021, and the decline has accelerated in recent months. Goldman Sachs prime brokerage data shows that net leverage reached an all-time high in the spring of 2021 and is currently at the 30th percentile over the past five years.

Despite the recent bear pressure, the allocation of funds to the stock market by various investors, especially retail investors, remains high, indicating that if the macro environment continues to deteriorate, the stock market will face more selling pressure.

3. The most popular stocks on the hedge fund VIP list

While tech stocks sold off, FAAMGs (Facebook, Apple, Amazon, Microsoft, and Google) remained the most popular, with Microsoft in the top spot. This list includes 50 stocks held by the top ten hedge funds, including four energy stocks, namely Chesapeake Energy CHK, Valaris VAL, Occidental Oil Company OXY and Cheniere Energy LNG, with an energy sector weight of 10%.

Since 2001, the quarterly stocks on the list have outperformed the S&P 500 58% of the time, with an average quarterly extra gain of 40 basis points.

There are 16 new additions to the list: Anson Insurance, Apollo Global Management, Activision Blizzard, Chesapeake Energy, Change Healthcare, CrowdStrike, EQT Energy, Five9, Global Payments Limited, Humana, Marvell Technologies , Occidental Petroleum, Anaplan, AT&T, Walsburgh, Zillow-C.

4. Growth stocks

Hedge funds continued to reduce their exposure to growth stocks. Rising interest rates and falling leverage have dragged down the market value of these extremely high price-to-earnings ratios.

5. Industry

Hedge funds increased their exposure to industrials and materials, reducing exposure to previously popular growth stocks. Preferences for information technology and consumer discretionary fell to their lowest levels in at least a decade. Big tech stocks have been the main target of lower positions in both sectors, with capital gradually shifting elsewhere from Apple, Amazon and Tesla.

Goldman Sachs analyst Ben Snider said the broad stock market decline, with the most bullish stocks falling even worse, led to the worst start to the year for hedge funds on record. High-frequency data shows that the average return of equity hedge funds so far this year is -9%, and Goldman Sachs Prime Brokerage Services expects an asset-weighted decline of 17%.

As a result, in recent months, hedge funds have accelerated their de-leveraging, moving away from growth stocks that had been massively adding to their positions a few quarters ago, while increasing their short positions.

However, Goldman Sachs also said that these adjustments were not fast enough. While four energy stocks joined the list of the most popular stocks for hedge funds, technology stocks still accounted for more than one-third of the list of 50 companies. Five large technology stocks still occupy the most important position.

The stocks on this list have returned -27% year-to-date, compared to -18% for the S&P 500, and last year’s list of companies trailed the S&P 500 by just 17 basis points. Year-to-date, these stocks have given back all of the extra returns from 2014 to date.

Overall, Goldman believes that changes in hedge fund positions reflect capital allocation adjustments across the market. Growth stocks have benefited as institutional and retail investors have increased their holdings of stocks over the past few years as low interest rates have bolstered the narrative that there is no alternative to equities.

Today, with real interest rates out of negative territory, recession fears intensify, and stock markets tumbled. This all shows that, in addition to stocks, there are other more reasonable options. Investors adjusted accordingly, with both institutional and retail investors fleeing the stock market, especially growth stocks.

Hedge fund corrections will accelerate the vicious cycle of falling share prices – falling leverage – illiquidity. It will also complicate the investment climate this year.

This article is reprinted from: https://news.futunn.com/post/15787789?src=3&report_type=market&report_id=206424&futusource=news_headline_list
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