Hedge Funds Rush Back Into U.S. Stocks Amid Market Optimism

Last week, global hedge funds began to add U.S. stocks to their portfolios following a massive drop in Wall Street’s main indexes. This was an early sign of optimism for the country.

Goldman Sachs stated in a separate report that hedge funds began to increase exposure to the largest economy in the world for the remainder of the week, up until Thursday.

The bank revealed that hedge funds have increased both their long and short positions on U.S. stocks. They also noted that hedge funds’ portfolios globally became more bearish as the percentage of bets predicting a fall in stocks grew relatively long positions. JPMorgan also revealed the same trend in a separate note.

Goldman said that portfolio managers in Europe and Asia continued to reduce risk. Goldman said that European stocks and emerging markets in Asia were sold at a faster pace than in the past five years.

The deleveraging seen between Friday and Monday was the largest in four years. Some of the activity is comparable to that early in the COVID pandemic.

Investors grew wary about the economy amid uncertainty surrounding President Donald Trump’s trade policy, and all major U.S. indices suffered losses last week.

The S&P 500, Dow Jones Industrial Average, and Nasdaq all had a good day on Friday.

Investors are looking for bargains and adding bets on stocks’ further decline.

JPMorgan reports that trend-following hedge funds, or CTAs, are net short of U.S. stocks.

Barclays stated in a Friday note that some signs of capitulation are present in the U.S. Market, which may prompt some to “buy the dip”, although uncertainty over tariff policy might contain this trend.

Charles Lemonides of ValueWorks long/short equity hedge fund has added U.S. long positions to his portfolio during the selloff. He believes that a 10% correction in both the Nasdaq index and S&P could present some opportunities.

“The market is down, and it’s safe to assume that this will continue.” He said: “We haven’t yet seen a recession or any real economic slowdown.”

The valuation gap between Europe and the U.S. has been narrowed by the 7.68% increase in the STOXX 600, while the S&P 500 fell 4%. This makes the stocks of the “old continent”, less attractive.

Anders Hall is the chief investment officer of Vanderbilt University. He said that hedge funds are taking a more conservative approach, as the uncertainty surrounding U.S. Trade Policies and a possible recession will likely remain. However, Europe faces its own economic and political challenges.

Europe has a rearmament program, driven by the fear that it cannot rely on U.S. security as long as Russia’s conflict in Ukraine continues. Germany announced an infrastructure and defense spending spree. Tariff threats are also a concern in the region.

He said that while the U.S. is not free of risks, it may be seen by some as a safer bet. U.S. stock markets are also more liquid than those in Europe, which could be a benefit if hedge fund positions need to be adjusted due to increased volatility.