Hedge funds endured a difficult week last week, according to a report by Morgan Stanley. This pain stemmed from a combination of factors: Falling Markets: Ma

Hedge Funds Hit Hard by Market Downturn


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Image credit: Maxim Hopman

Hedge funds endured a difficult week last week, according to a report by Morgan Stanley. This pain stemmed from a combination of factors:

  • Falling Markets: Major U.S. indices, including the S&P 500, Nasdaq, and Dow Jones, all experienced declines.
  • Disappointing Earnings Reports: Tech giants like Dell Technologies and Salesforce fell short of expectations, impacting the broader market.
  • Slower Economic Growth: Economic data indicated a weaker-than-anticipated economic growth in Q1.

Hedge Fund Struggles:

  • Long Bets Backfire: Hedge funds, which typically hold long positions (bets that a stock will rise), suffered losses as the overall market dipped.
  • Selling Spree: Morgan Stanley, a leading prime broker, observed hedge funds net selling equities across all regions, particularly in North America's tech, media, and telecom sectors. This selling included prominent large-cap stocks.
  • Short Selling Uptick: In addition to reducing long positions, hedge funds also increased short bets (wagers that a stock's price will fall) across various markets.

Performance Lag:

  • Weekly Performance: Compared to the S&P 500's 1.3% decline, Americas-based long/short funds suffered a steeper drop of 0.9%.
  • Monthly Performance: Over the month, these hedge funds only captured 35% of the S&P 500's gains, highlighting their underperformance.

In essence, the confluence of a bearish market, disappointing corporate earnings, and concerns about slowing economic growth led to significant losses for hedge funds, particularly those heavily invested in long positions and technology stocks.

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