Hedge funds, otherwise known as the “smart money,” have been dumping stocks for the past seven days at the fastest pace on record, according to Goldman Sachs.
Friday’s and Monday’s vicious selloff exploded to the highest levels Goldman has been tracking since April 2008.
“They’re saying the market’s going down further,” Benjamin Dunn, president of Alpha Theory Advisors, tells Bloomberg Businessweek. “Sentiment is just pretty much in the toilet.”
Hedge funds’ gross leverage—a reading on both their bullish and bearish stakes—is at a five-year low, according to the Goldman data.
Bank of America, in its latest fund manager survey, found that investor fears of stagflation—as well as global profit expectations—are both at their highest readings since the 2008 financial crisis.
BofA Global Research strategists noted that the profit outlook of the 266 investment managers, with $747 billion in assets under management, are at levels seen prior to other Wall Street crises. This includes Lehman Brothers’ bankruptcy, the Great Recession of 2008-09, and the bursting of the dot-com bubble in 2000.
The BofA survey was conducted prior to the Labor Department’s release of May’s 8.6% consumer price index (CPI) figure, on June 10.
“Wall Street sentiment is dire,” wrote BofA lead market analyst Michael Hartnett. “No big lows in stocks before big high in yields and inflation, and the latter requires uber-hawkish Fed hikes in June and July.”
Seventy-three percent of the investment managers surveyed expect a weaker economy in the next 12 months, the highest percentage since Goldman launched the survey in 1994.
The investment managers are long: cash, U.S. dollar, commodities, health care resources and high-quality and value stocks. They are short: U.S. Treasury bonds and Bitcoin; as well as equities of European, emerging-markets and China stocks; and technology and consumer goods and staples.
Their most crowded trades are long oil and commodities.
The biggest tail risk the investors see is hawkish central banks, otherwise known as monetary risk, followed by a global recession. These two factors have overtaken geopolitical risk as the biggest potential disruptor to financial market stability.
Move to Cash
“Unlike index-based strategies that need to be fully invested, funds run by active managers have the ability to shift some assets to cash to ride out the market volatility and wait for better buying opportunities,” says Todd Rosenbluth, head of research at Vetta Fi. “Such cash balances can also provide some downside protection.”
Hartnett added that with the Federal Reserve set to deliver more rate increases, including an expected 50- to 75-basis-point hike today, June 15, the market has not yet reached “full capitulation.”
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