Hedge Fund Strategy Shifts

Hedge funds are no longer purchasing dips before major macroeconomic events, according to a recent note from Barclays strategists.

While there was some re-grossing in equity markets last month, discretionary equity exposure has not returned to the highs prior to the de-risking period in August. Long-only funds have started to rebuild their positions; however, their equity exposure remains near the lows of 2020-2021.

Global macro and multi-strategy hedge funds were active buyers during the summer risk-off period, but have taken a pause since then.

Near-Term Risks
Barclays highlights that near-term risks, including the seasonality of September/October—when SPX historically experiences larger drawdowns—and uncertainties surrounding U.S. elections, are keeping investors cautious.

Barclays notes that equity positioning does not seem overly stretched, and equities might become more appealing toward the year’s end, especially after resolving U.S. election uncertainties. Despite new highs in equities, macroeconomic and earnings fundamentals remain supportive, bolstered by a growing expectation of a 'Goldilocks' soft landing scenario due to strong U.S. macroeconomic data, easing inflation, and the Federal Reserve's aggressive 50 basis point rate cut.

In September, the U.S. job market demonstrated strength, with nonfarm payrolls rising by 254,000—much higher than the expected 150,000 and up from a revised 159,000 in August. The unemployment rate slipped slightly to 4.1%, indicating a robust employment environment.

In contrast, long bond positioning appears quite extended, suggesting that bond investors are skeptical about economic prospects.

Policy Divergence
Lastly, the policy divergence between the Bank of Japan and the Federal Reserve is causing speculative investors to become increasingly bullish on the Japanese yen.