- Hedge funds sold equities at the fastest pace since January 2021, driven by significant losses in major technology companies.
- Amid electoral uncertainty, funds reduced both long and short positions to minimise risk ahead of the US presidential election.
OUR TAKE
Hedge funds have sold off their equity holdings at a rapid pace, the fastest since the meme stock phenomenon in January 2021. This sharp reduction in hedge fund equity positions, as reported by Goldman Sachs, is largely in response to significant losses in major technology companies and in anticipation of potential market volatility related to the upcoming US presidential election. The sell-off was particularly strong in sectors such as semiconductors, mega-cap stocks and AI-driven companies. The recent sell-off highlights the volatile nature of the stock market, even within sectors that have traditionally been considered stable. This shift also suggests a growing trend towards risk aversion as the market becomes more unpredictable.
—Heidi Luo, BTW reporter
What happened
Hedge funds sold off their equity holdings at the fastest pace since January 2021, reacting to heavy losses in major technology companies. The widespread selling took place in the week ending 19 July, with a sharp pullback as the S&P 500 posted its worst weekly performance since April, according to Goldman Sachs. Funds reduced positions across both their long and short books.
These funds have been liquidating assets since May to increase their cash reserves in preparation for potential market instability in the run-up to the US presidential election. Sectors such as semiconductors, large-cap technology companies and AI-related stocks have seen the most intense selling, which signals a broad de-risking by hedge funds. This strategy was part of a wider trend to reduce exposure to market volatility and hedge investments against a backdrop of economic uncertainty.
“Wednesday felt like peak de-risking and fundamental long-short hedge funds pain. Most of the supply we saw was from generalists reducing exposure in year-to-date artificial intelligence winners,” Goldman’s US shares sales trading team said in a note.
Also read: Goldman’s hedge-fund clients get more active with crypto options
Also read: Microsoft: 8.5M devices affected by CrowdStrike outage
Why it’s important
In 2021, financial markets experienced a unique phenomenon known as the “meme stock craze”. This event was marked by dramatic increases in the share prices of companies such as GameStop and AMC Entertainment, driven largely by retail investors organised through social media platforms such as the Reddit forum “r/WallStreetBets”.
Specifically, These investors, often using apps like Robinhood, bought shares and options to force a “short squeeze”, where short sellers had to buy shares to cover their bets, pushing prices even higher. This led to significant market volatility and media attention.
According to Goldman Sachs, hedge funds’ long-short net leverage, which measures their willingness to take risk, fell to 49.8% last week. This decline points to a reduced appetite for risk among investors. Specifically, sectors such as IT, healthcare, financials and energy have seen the most significant reductions in investment.
Last week, technology stocks fell sharply after a major cybersecurity software glitch grounded flights and disrupted global business operations. In addition, investors shifted their focus to smaller companies amid growing speculation that interest rates could be cut.
