(Bloomberg) Wondering who’s driving this year’s advance in stocks? Individual investors have played a role, and so have companies themselves. But to date one notable class of professional speculators has been absent.
It’s hedge funds, who have stubbornly refused to embrace stocks even as global equities added $10 trillion in value over the last three months. At the end of March, their net exposure as measured by the ratio of bullish bets to bearish ones stood near the lowest level in more than a year, client data compiled by JPMorgan’s prime brokerage unit showed.
The lack of conviction has been cited by a chorus of strategist as evidence stocks have further to rise -- a plank in a bull case that says Federal Reserve dovishness will eventually force everyone back into equities. The S&P 500 is up 2 percent this week and has less than that to go to erase losses from its worst fourth quarter in 10 years.
“Funds initially missed the rally, and perhaps many think now is too late to enter the market,” said Marko Kolanovic, global head of macro quantitative and derivatives strategy at JPMorgan. “As some of these investors throw in the towel and add net exposure, it would provide additional fuel.”
Of course, it’s possible hedge funds will stick to their guns and resist jumping in. Something like that happened in the second half of last year, and paid off when the S&P 500 plunged to the brink of a bear market. This year’s skepticism isn’t denting demand for their services. About a third of respondents in a separate JPMorgan survey said they plan to boost allocations, up from 15 percent in 2018.
“It’s for differentiated exposure but also some positive returns when the market turns south,” said Crit Thomas, global market strategist at Touchstone Advisors in Cincinnati. “I’m not sure the pressure really necessarily is there or not.”
In the final week of March, hedge funds sold stocks and raised their bearish bets, particularly in financial and industrial shares, data compiled by Goldman Sachs showed. Their net leverage, a measure of industry risk appetite, fell by 2.2 percentage points to 61.7 percent. That’s in the 4th percentile of a one-year range.
Hedge funds that focus on equities climbed 6 percent in the first quarter, according to Hedge Fund Research, compared with a 13 percent gain in the S&P 500. While comparing that two returns is arguably unfair, it remains the industry’s worst relative start of a year since 2012.
Any number of concern could be keeping hedge funds on the fence. The easiest to explain is the state of the economy and corporate earnings, both of which are forecast to see slowing growth in 2019.
“They’re not participating because they see this rally as more driven by sentiment as opposed to underlying fundamentals,” Touchstone’s Thomas said. “It’d be better visibility of a true turn in fundamentals that would bring them back in.”
