What’s going on here?
Hedge funds unloaded $20 billion in equities after Tesla and Alphabet’s earnings missed the mark, sparking a sweeping sell-off. Brace yourselves, though: another $25 billion could follow suit next week.
What does this mean?
The financial world is in a tizzy, thanks to disappointing earnings reports from heavyweights Tesla and Alphabet, which led to a 3.6% drop in the Nasdaq Composite – the worst since October 2022. Morgan Stanley’s data reveals that computer-driven macro hedge funds drove the $20 billion sell-off and expect another $25 billion of equity unwinding soon. This marks one of the most significant de-risking events in the last ten years. The initial shift of market focus from mega caps to small caps has escalated into broad index deleveraging. If volatility lingers, even a 1% drop in global equities could lead to $35 billion in sales, with a 3% drop potentially triggering $110 billion in sales.
Why should I care?
For markets: Rethinking risky bets.
Hedge funds are growing more bearish, cutting down on long positions and ramping up shorts, particularly in IT, consumer staples, and materials. Goldman Sachs reports increased short positions in large-cap and corporate bond ETFs, reflecting cautious investor sentiment. Despite Thursday’s boost from stronger-than-expected GDP data, the recent sell-off reveals the market’s fragile state and could push investors to reconsider their equity-heavy portfolios.
The bigger picture: Echoes of past downturns.
Historically, interest rate hikes often precede economic downturns, but many investors are betting on bucking that trend this time around. However, the reaction to Tesla and Alphabet’s earnings might be an ominous sign. Global hedge funds averaged a 0.67% drop following the sell-off, with the most significant declines in Americas equities long/short hedge funds. Major indices also dipped: the MSCI All Country World Index fell 1.67%, and the S&P 500 dropped 2.31%, marking the worst drawdown of an otherwise positive year for hedge funds.