Hedge Funds Scoop Up Stocks to Gain From the First Sharp Dip in Over a Year

Amidst growing concerns over a delay in interest rate cuts by the Federal Reserve and escalating geopolitical tensions, the tech-focused Nasdaq 100 suffered its steepest weekly fall since November 2022 last week. Despite the broader market retreat, Hedge funds ramped up trading to take advantage of the first sharp dip, with new long positions established, surpassing short sales for the first time in weeks.

Data from Goldman Sachs reveals that gross leverage among global hedge funds surged to a five-year peak in the week leading up to April 19. This indicates an increase in borrowing to fund investments, which magnifies both potential gains and risks for these funds.

The report, which was released on Friday and obtained by Reuters on Monday, shows that gross leverage climbed by 2.6 points from the previous week, reaching 270%. Meanwhile, the overall net leverage—a measure of total assets against actual ownership—edged up by 0.5 points to 73%.

Stock-picking hedge funds, particularly those not reliant on algorithmic trading, were identified as the primary drivers of this uptick in leverage levels. Goldman Sachs noted that these funds increased their leverage, although the report did not specify the leverage used by systematic hedge funds.

The pivot in hedge fund behavior was evident last Wednesday and Thursday when funds reversed their preceding three weeks of selling, choosing instead to "buy the dip" in global equities, particularly in U.S. and European markets.

Despite the turbulence, this type of market behavior is not without precedent. The S&P 500 has averaged three annual pullbacks of 5% or more each year since 1929, according to a study by Bank of America.

In this recent buying wave, hedge funds have shown a strong preference for technology firms, recording the highest level of net purchasing in this sector in two months. However, their short positions in consumer discretionary stocks, which include luxury goods and travel, have persisted.

The Goldman Sachs report further detailed that hedge funds were active buyers across various sectors, including healthcare, technology, real estate, and industrials. Geographically, North America and Europe experienced net buying, while Asia saw net selling over the last week.

This resurgence of hedge fund activity signals a bullish turn in market sentiment as these sophisticated investors seek to capitalize on market fluctuations despite the underlying risks and uncertainties. As the financial landscape continues to evolve, market watchers will undoubtedly keep a close eye on hedge funds' strategies and their potential impact on stock valuations.