After eight weeks of continuous selling, hedge funds are buying back US stocks, setting the fastest pace since 2021

After 8 weeks of selling off, US hedge funds bought stocks at the fastest pace since 2021.

On Monday, October 14th, financial blogger Tyler Durden published an article stating that recently, trading volumes of US hedge funds and the overall stock market have significantly increased, with the US stock market experiencing active buying and market growth. However, the market's high valuation is a concerning issue that may trigger future adjustments.

According to Goldman Sachs Prime Brokerage data, hedge funds' net buying volume of individual stocks is the largest since December 2021, with 7 out of 11 sectors being net bought this week. Nominal amounts show that the healthcare, financial, industrial, and information technology sectors are leading. Fund managers have been net buying US healthcare stocks for the third consecutive week, marking the fastest pace in over a year.

For most of the second half of this year, especially since the arbitrage trading collapse in August, US stocks have seemingly overcome various concerns and continued to rise. Last Friday, the S&P 500 index hit its 45th all-time high of the year, marking the best performance of the 21st century.

Surge in US stock market trading volume, concerns over high valuation

According to Goldman Sachs Prime Brokerage data, after 8 consecutive weeks of selling off, hedge funds' net buying speed of US stocks has set the fastest record in 4 months, mainly driven by individual stocks. The net buying volume of individual stocks has reached the highest level since December 2021, with a long/short ratio of 1.2 to 1.

However, despite this frenzy of buying, hedge funds' overall investment levels remain relatively low. The total leverage ratio of US fundamental long/short funds has only increased by 0.2 percentage points to 192.4%; the net leverage ratio has increased by 1.3 percentage points, reaching only 53.5%; and the long/short ratio has increased by 1.5 percentage points to 1.777.

Looking at the data from Goldman Sachs' stock sales trading department, the buying volume is even more pronounced. Goldman Sachs trader Matt Kaplan pointed out that thanks to moderate PPI data offsetting the impact of rising CPI, the market saw broad gains last week as the S&P 500 hit new highs again, with equal-weighted indices outperforming weighted indices by about 40 basis points, and the Russell index rising by 2%.

Amidst the high trading volume and high valuations in the US stock market, Kaplan stated:

"The only ongoing debate in the bear market is the excessively high valuations."

Durden believes this can be understood, as even Goldman Sachs analyst David Kostin admits that the current forward P/E ratio of US stocks has reached a "ridiculous" level of 22 times!

Hedge funds' net buying speed of US stocks sets fastest record in 4 months

Here are the detailed statistical data on the US stock market from Goldman Sachs Prime Brokerage for last week: Macro products such as indices and ETFs saw a slight net selling, mainly driven by short sales. Short positions in US-listed ETFs increased by 1.3%, mainly concentrated in large-cap stocks and corporate bond ETFs.

Individual stock net buying reached its highest level since December 2021, mainly driven by long buying and short covering. Out of the 11 sectors, 7 were net bought this week. Nominal amounts show that the healthcare, financial, industrial, and information technology sectors led the way, while sectors with high dividend yields such as real estate, utilities, and consumer staples were net sold.

The information technology sector performed the best this week, with a high net buying volume, mainly driven by long buying with a slight amount of short covering. The software and technology hardware industries saw the most net buying, while the semiconductor and equipment industry saw the most net selling. Despite recent increases in buying volume, net positions in US software stocks remain relatively low.

Fund managers have been net buying US healthcare stocks for the third consecutive week at the fastest pace in over a year, mainly driven by long buying and short covering.

All sub-industries were net bought this week, with biotechnology, pharmaceuticals, and healthcare providers and services leading the way. The total long-short ratio for pharmaceuticals, biotechnology, and life sciences stocks is now at 2.70, reaching the highest level since May, although still in the 12th percentile over a five-year period