Hedge funds cut back on risk, fearing increased volatility By Reuters

By Carolina Mandl

NEW YORK (Reuters) – Portfolio managers at hedge funds pulled back from some of their riskier positions after a volatile week for markets.

A brutal sell-off and rally in global markets over the past week was triggered by billions of dollars worth of trades financed by the yen and concerns that the US economy was headed for a recession. It ended at its highest close in nearly four years on August 5.

The market run has been painful for a number of hedge funds. Global macro-quant funds lost between 1.5% and 2.5% between August 1 and August 5, while tech-focused hedge funds lost between 2.5% and 3.5%, according to the model of hedge fund research firm PivotalPath.

“We have seen some degree of deleveraging,” said Edoardo Rulli, chief investment officer at UBS Hedge Fund Solutions, which invests in hedge funds. “Don’t Panic, Portfolio Managers Cut Positions.”

An unexpected spike in volatility will likely suppress risk appetite until investors feel more comfortable with the outlook for global growth, according to Sophia Drossos, economist and strategist at Point72 Asset Management.

“When you have a very long-term trade that starts to unwind very suddenly, it affects risk appetite. We will likely see an environment where investors remain reluctant or resentful of taking on too much risk again,” she said. “It could be a headwind for the rest of the summer.” Drossos’ views do not necessarily reflect the hedge fund’s position, the fund said.

In the last week there has been a unwinding of various positions.

Commodity trading advisors (CTAs), or money managers who follow market trends, saw a “sudden unwinding” of long stocks, short yen and short Japanese and German 10-year bonds, starting with the weaker-than-expected data had anticipated about US jobs. Aug. 2, JPMorgan said in a note last week.

A Goldman Sachs prime brokerage note to clients also showed on Friday that long/short equity hedge funds cut their global exposure to Japan to 4.8% last week from 5.6% the previous week , while reducing the leverage of the overall portfolios by almost a percentage point. , at 188.2%.

Data from the US Commodity Futures Trading Commission and LSEG released on Friday showed that hedge funds’ position against the Japanese yen shrank to the smallest net short position since February 2023 over the past week, indicating that investors also ended trading in the yen.

MACRO CONCERNS

Top of mind for portfolio managers – and helping de-risk portfolios – is the state of the US economy, while fears of a recession in the world’s largest economy intensified after the US jobless rate rose in July.

Rulli said macro hedge funds were reconsidering some positions, even as they made money during the market move after long U.S. rates.

“Macro hedge funds still have some confidence in the steepening of the yield curve, but they’re getting some returns because they’ve obviously done very well over the last four weeks,” Rulli said.

The odds that the Federal Reserve will cut rates by 25 basis points or 50 basis points at its next meeting in September are about the same, according to the August 11 CME FedWatch tool.

“If there’s a 50/50 chance of the Fed cutting 25 basis points and cutting 50 basis points, that’s maximum uncertainty,” said Richard Lightburn, deputy chief investment officer at macro hedge fund MKP Capital Management . He considered potential portfolio adjustments to reflect the unknown environment.

“That tells you something — the market really doesn’t know what’s going to happen, and that means there’s going to be volatility,” he said.