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Hedge Funds Ramp Up Market Bets As Volatility Brings The Asset Class Back Into Favor

Extreme market volatility hasn’t slowed hedge funds down. In the week leading up to the Federal Reserve’s rate decision, hedge funds’ total gross trading flow rose for five weeks in a row and had the largest notional increase since 2017, according to Goldman Sachs’ prime brokerage data. This means they are putting money to work in a big way to benefit clients who are shorting the market. The industry increased its exposure when the Federal Reserve aggressively raised interest rates to tame decades-high inflation, raising the odds of a recession. In fact, Bank of America’s Michael Hartnett described investor sentiment as “unquestionably” the worst since the financial crisis. “Uncertainty over inflation and tightening policy may spur more volatility. This speaks to hedge fund strategies,” said Mark Haefele, global wealth management CIO at UBS. “Hedge funds have been a rare bright spot this year, with some strategies, like macro, performing particularly well.”

Despite the chaos in the market, some major players are succeeding. According to data from HFR, hedge funds gained 0.5% in August, compared to a 4.2% loss for the S&P 500. Citadel’s multi-strategy flagship fund Wellington gained 3.74% last month, bringing its performance for 2022 to 25.75%. During the year’s first half, Ray Dalio’s Bridgewater gained more than 30%. On the short side, hedge funds were not overly bearish despite a challenging macroeconomic environment. Among the data provided by JPMorgan’s prime brokerage, shorting activity has been lower than in June, and shorts added have been more focused on exchange-traded funds than individual stocks. “In terms of how much HF shorting we see, it’s not reached the extremes of June, and it has been more in line with the magnitude of longs added,” JPMorgan’s John Schlegel said in a Wednesday note. “It seems there’s a lack of willingness to get as extremely bearish as funds were earlier this year.”

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