Hedge funds turn bearish again as yields spike

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Global hedge funds increased their bets that stocks will fall in a week when bond yields rose after the United States’ credit rating was downgraded, a Goldman Sachs report on Friday showed.

Hedge funds added 4.6 short positions to each long position from July 7 to Aug. 3. “After three straight weeks of risk unwinds, the overall prime book was net sold on the week,” the report said.

Hedge funds were forced to partially unwind short bets in July to avoid further losses during a market rally triggered by better-than-expected corporate earnings.

The rally was interrupted this week after credit rating agency Fitch downgraded the U.S. ahead of an expected flood of Treasury supply in the third quarter. Higher yields can reduce the appeal of stocks.

Both the S&P 500 (.SPX) and Nasdaq Composite (.IXIC) registered their biggest weekly declines since the week ended on March 10, with losses of 2.27% and 2.85%, respectively.

Goldman Sachs, as one of the biggest providers of lending and trading services through its prime brokerage unit, can track the movements of large hedge funds and asset managers.

The bank said its clients are placing bearish bets mainly through indexes and exchange-traded funds, not using particular stocks.

Equity long/short hedge funds have been vocal about the challenges of being bearish this year, as they were caught off-guard by a rally. Their performances have been hit by the losses with short positions.

Billionaire investor Daniel Loeb said in a letter on Thursday he had decided to trim his short bets to limit the vulnerability of his hedge fund, Third Point.

Investors were more bearish on North America and Asia, driven by Japan, and more bullish on Europe.

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Edmund Shing, PhD

Global Chief Investment Officer
BNP Paribas Wealth Management

Edmund has over 29 years of experience in financial markets in a wide variety of positions, ranging from proprietary trading to portfolio manager in a number of financial institutions in London and Paris.  He previously held the role of Global Head of Equity and Derivative Strategy at BNP Paribas in London from 2015 to 2020, and has been Chief Investment Officer at BNP Paribas Wealth Management since November 2020.

Edmund is responsible for piloting our investment strategy and will continues to rollout out recommendations and themes with actionable advice that brings our expertise to our clients and support to our client-facing teams.  In this time of change, his expertise in following and anticipating markets is a true value added for both our customers and those at Wealth Management who serve them.

Edmund has a PhD in Cognitive and Computing Science from the University of Birmingham in the United Kingdom, and has done advanced studies in Knowledge-Based Systems and in Experimental Psychology.  He is an EFFAS-certified financial analyst. He has also authored the book “The Idle Investor” published by Harriman House in 2015, proposing 3 simple investment strategies that take only a few minutes to execute per month.

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