Reject high risk! After Black Monday, hedge funds dare not "surf" again

After experiencing a turbulent market week, hedge fund portfolio managers have withdrawn from some high-risk positions.

Last week, global markets saw a wave of intense selling and rebounding due to the reversal of a multi-billion dollar yen financing trade and concerns about the US economy falling into recession. The Chicago Board Options Exchange Volatility Index (VIX) closed at its highest level in nearly four years on August 5.

The market downturn has caused pain for many hedge funds. According to hedge fund research firm PivotalPath's exposure model, from August 1 to August 5, global macro quant funds lost between 1.5% and 2.5%, while tech-focused hedge funds lost between 2.5% and 3.5%.

"We have indeed seen some deleveraging," said Edoardo Rulli, Chief Investment Officer of Hedge Fund Solutions at UBS. "There is no panic, but portfolio managers are reducing positions."

Sophia Drossos, economist and strategist at Point72 Asset Management, stated that unexpected volatility spikes may dampen risk appetite until investors are more confident about global growth prospects.

Drossos said, "When a very long trade suddenly reverses, it does hurt risk appetite. We may see an environment where investors remain hesitant or cautious about taking on too much risk again, which could be a headwind for the remaining summer."

Last week, various positions experienced reversals.

JPMorgan stated in a report last week that Commodity Trading Advisors (CTAs), fund managers who follow market trends, began "significantly reversing" long stock positions, short yen positions, and short positions in Japanese and 10-year German bonds after the weaker-than-expected US employment data released on August 2.

Goldman Sachs' brokerage division also issued a report to clients last Friday, showing that long/short equity hedge funds reduced their total exposure to the Japanese market to 4.8% last week, down from 5.6% the previous week, while lowering their overall portfolio leverage by nearly one percentage point to 188.2%.

Data released by the US Commodity Futures Trading Commission and LSEG last Friday showed that hedge funds' net short positions on the yen fell to the lowest level since February 2023, indicating that investors have also reduced yen carry trades.

The current top concern for portfolio managers is the US economic situation, which is also the reason for de-risking their portfolios. With concerns escalating about the world's largest economy falling into recession after the rise in US unemployment rate in July.

Rulli mentioned that even though macro hedge funds profited from the market downturn after going long on US Treasuries, they are reconsidering some positions. He said, " Macro hedge funds still believe the yield curve will steepen, but they are taking profits because it is clear that US Treasuries have performed very well in the past four weeks According to the CME Group's FedWatch Tool, the possibility of the Fed cutting rates by 25 basis points or 50 basis points at the next meeting (in September) is almost equal.

Richard Lightburn, Deputy Chief Investment Officer of macro hedge fund MKP Capital Management, said, "If the chances of the Fed cutting rates by 25 basis points and 50 basis points are equal, then this will be the biggest uncertainty," he has been considering adjusting portfolios to reflect this unknown environment. He added:

"This indicates some issues - the market really doesn't know what will happen, which means there will be volatility."