Investing.com — Hedge funds had a successful year in 2024 with average global gains of 12.1%. Long/short (L/S) managers led the way, with several other strategies also delivering double-digit returns, according to Goldman Sachs.
This performance occurred in the context of increased market volatility and a rapid rise in long-term rates at the start of the year. Total gross leverage rose to unprecedented levels, driven by higher short exposure. Over the past month, hedge funds have reduced net leverage at the fastest rate since mid-2022, implying a more conservative approach. This trend is in line with other sentiment indicators such as the funding range and the results of a recent QuickPoll survey.
At the same time, short US exchange-traded funds (ETFs) rose for four straight weeks, posting a 24% month-over-month gain. Short prices of individual US stocks have also risen for 12 consecutive weeks (22 of the last 24) on the Prime book, without a significant episode of risk reduction since July of the previous year.
In January, almost all regions recorded net sales, mainly in North America and, to a lesser extent, in Europe. All developed markets (DMs) in Asia experienced net sales, albeit modest in size. In contrast, net flows vary across emerging market (EM) regions. Chinese stocks have seen a slight increase in net distributions in recent weeks, but are still well below their five-year averages, sitting in the 14th percentile.
Hedge funds have rotated significantly from US technology, media and Telecom (BCBA:) (TMT) stock in the second half of 2024. However, recent flows suggest a potential shift in sentiment, with long purchases outweighing short sales in recent weeks. So-called “Mag7” stocks now collectively account for roughly 15.5% of total US net exposure, still around their lowest levels since mid-2023 despite a record peak of 21% in June 2024.
Healthcare has emerged as the sector with the largest net buying so far in January, driven by long buying in almost all subsectors. Sector positioning remains relatively weak, with gross and net exposures near one-year lows. Within the cycle, it is the sector with the largest net purchases at the start of the year, although net flows have been quite volatile since the US election. Despite the recent jump in , managers have aggressively net sold Energy shares to start the year, fueled by long selling.
From a factor perspective, hedge fund Momentum exposure has seen minimal change in recent months, remaining roughly in line with its five-year average. Conversely, exposure to the market sensitivity factor, an indicator of appetite for higher beta stocks, has fallen sharply and is now near five-year lows, suggesting a more defensive stance in early 2025.
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