Hedge Funds' May Sale Could Propel Stocks to Record Highs

Written by Simon White, Bloomberg Macro Strategist

It appears that hedge funds have taken the traditional advice to sell in May to heart. After maintaining a long position for most of the year, these funds seem to have shifted to a short position, coinciding with a rebound in the stock market. This could potentially lead to hedge funds that are currently offside chasing the market upwards for the remainder of the month.

Hedge Funds' Positioning in Stocks

We can get a sense of how hedge funds are positioned in stocks by examining the beta of hedge fund indices, in this case, the HFR’s Macro/CTA index, in relation to the S&P 500. The current data suggests that funds are collectively shorting the stock market. To understand what CTAs have been doing, we can look at the DBi Managed Futures ETF. This ETF exited the S&P in April and began adding to the MSCI EAFE, with its overall developed-market equity position trending downwards. As of last week, it holds long futures in MSCI EAFE, MSCI EM, oil, and gold.

Timing of Short Exposure to Stocks

The timing of hedge funds' short exposure to stocks coincides with a positive stock-bond correlation, a positive scenario for long-only investors. This means that stocks and bonds are rising simultaneously as yields decrease in response to recent weaker economic data. The bear steepening in the yield curve, typically harmful to risk assets, has given way to a more asset-friendly bull flattening.

Pushing the Stock Market to New Heights

With US stocks just shy of their all-time highs, there is a strong possibility that funds that find themselves offside could help push the stock market to a new peak. This would align with previous patterns where a change in stock leadership signaled the near end of a correction. However, even if a new high triggers additional buying, the bull trend may not be as smooth as before. Liquidity conditions are less favorable to rising risk assets. Reserves and the reverse repo facility (RRP) continue to trend downwards. Although tapering of quantitative tightening will alleviate some pressure, reserve liquidity will be less buoyant. Additionally, the government’s interest bill will continue to consume more reserves and reserve velocity.

Reconsidering the May Sale

Selling in May may not seem like a wise decision now, but by St Leger's Day in September, hedge funds that reenter the market might find that they have weathered significant volatility without sufficient upside to justify it.

Article by Tyler Durden

Friday, 10th May 2024 - 17:15

Concluding Thoughts

This article raises some interesting points about the potential impacts of hedge funds' trading strategies on the stock market. What are your thoughts on this? Do you think the May sale by hedge funds could indeed push stocks to new highs? Share this article with your friends and discuss it with them. Remember, you can sign up for the Daily Briefing, which is delivered every day at 6 pm.