Hedge fund stock pickers return in force amid chaotic markets
THE upending of markets by shifting central bank policy, war and the pandemic is convincing professional investors that the time is ripe to put their often-maligned stock-picking skills to work.
Hedge funds that make both bullish and bearish equity bets became big buyers of shares in individual companies in February for the first time in 4 months, prime broker data compiled by Goldman Sachs Group show.
The amount of net purchases in single stocks reached the highest level in the past year.
The strategy is far from without its risks in a market being whipped around as violently as this one by war in Europe and anxiety about inflation.
As often happens when big, world-changing headlines are moving indexes minute-to-minute, correlations among individual stocks have risen substantially recently.
Hedge fund managers are evidently persuaded that's about to change - or are at least betting that prices have fallen enough that bargain-hunting will pay in 2022.
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Their willingness to scour for cheap stocks at times of stress could be contributing to a floor in equities.
"Hedge fund managers now believe they can win by picking individual stocks," said Lawrence Creatura, a fund manager at PRSPCTV Capital.
"Previously there was a tide that went out and dragged all stocks that have a certain flavour out with the tide. And that tidal movement is now less important."
Stocks rallied on Wednesday (Mar 2) after US Federal Reserve chairman Jerome Powell backed a quarter-point interest-rate hike this month while pledging to be judicious in removing stimulus.
Up 1.9 per cent, the S&P 500 just posted its 12th daily moves of at least 1 per cent since the start of February - 5 up and 7 down - while yields on 10-year Treasuries jumped 15 basis points after falling more than 20 to start the week.
Jarring reversals have been a regular feature of markets in 2022 as traders struggle to get a grip on the path of economic growth with lingering uncertainty around monetary policy following Russia's invasion of Ukraine.
The Cboe Volatility Index has averaged 24.6 this quarter, a level not seen in the past decade outside of the pandemic year of 2020.
While synchronised fortunes among individual shares are often viewed as a tough environment for stock pickers, hedge funds are betting the time is now to showcase their prowess.
Those tracked by Goldman scooped up tech stocks at the fastest pace since December 2020, warming to an industry that caused them pain in January's violent market rotation into shares that looked undervalued based on fundamentals.
Meanwhile, the fast-money crowd doubled down on bearish positions in macro products that are more sensitive to economic and political events.
Short sales on ETFs, for instance, jumped 12 per cent in February, the largest monthly increase in the past year, Goldman data show.
"It makes sense to see bargain hunting particularly in what I assume are considered oversold growth names given the increasingly opaque macro backdrop," said Benjamin Dunn, president at Alpha Theory Advisors.
"Adding ETF shorts speaks to an easy way to reduce net exposure while hanging on to longs."
With their equity exposure falling to post-pandemic lows, it's hardly a vote of confidence from hedge funds that the worst is over after a 2-month slump that sent the tech-heavy Nasdaq 100 to the brink of a bear market.
The group's long-short ratio, a measure of equity exposure that compares bullish to bearish positions, fell to the lowest level since June 2020.
Still, improving fund performance after a brutal January may have helped revive conviction in their ability to identify individual winners in a volatile market.
As a group, they lost 1.7 per cent in February, outperforming an MSCI benchmark index by almost one percentage point, Goldman data show.
"Since March 2020, the Fed's massive stimulus programme did raise all boats in a meaningful way. With this stimulus subsiding, investors have to be much more discriminating," said Matt Maley, chief market strategist at Miller Tabak + Co.
"It looks like hedge funds are willing to play in some individual names in a big way, but they're hedging themselves with index ETFs." BLOOMBERG
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