Hedge funds are investment partnerships that have the flexibility to invest aggressively in a wider variety of financial products than the average mutual fund. These funds are essentially financial partnerships that use pooled funds and different strategies to generate returns for their investors and are typically only accessible to accredited investors. They can use a broker’s money to make larger investments to chase larger returns and ultimately bring in more capital. Recently, hedge funds have drastically scaled back their presence in the US stock market following sharp swings which have negatively impacted returns.

Stocks across the world were hit with rapid sales between March 11-14 as investors have taken extreme measures to reduce risk. This have been followed by a major pullback by hedge funds everywhere, particularly those with a focus on the US market after the largest five-day period of North American stock sales this year.

Hedge funds and borrowed money

A lot of hedge funds use borrowed money to improve their returns. When the market becomes more volatile, they cut back and begin to shrink positions, term analysts refer to as “de-grossing”. The market rallied last week as funds reduced the risks, they were willing to take. Barclay’s brokerage unit showed that gross leverage dropped last month to the lowest level in at least a year. This is because even before the latest dip in the market, various equity funds were scaling back the size of trades made with borrowed money.

The S&P 500 index has fallen by 11% this year due to investors responding to surging inflation. There have been tighter monetary policies put in place from the Federal Reserve, alongside sanctions on Russia for the invasion of Ukraine, which has driven up commodity prices across the globe. The underlying issue is that uncertainty has thrown the global growth forecasts into doubt.

US stock market

Morgan Stanley reported the largest five-day period of North American stock sales by hedge funds since January of 2021 when meme-stock disrupted the market or the start of the pandemic lockdowns. This has been the worst sell-off, selling of a large volume of assets, in the US stock market since the start of the pandemic. Tech and consumer stock holdings sold faster than they have at any point in the last 10 years. One of the largest tech investors in the world, Tiger Global Management fell 23.2% in its main hedge fund across February 2022, as most of their stocks are tech and consumer stocks.

The cost of gasoline (petrol) has surged in the US since February following Russia's invasion of Ukraine, which has made commodities such as crude oil considerably expensive. The S&P 500, the 500 leading publicly traded companies in the U.S just ended a 3-day dip and is now up by 2.14%. Oil prices have stabilised recently at just below $100 a barrel after surging to over $139 last week. This has provided relief for equity investors after increasing pandemic lockdowns in China had investors concerned about a drop in demand for oil.

Russian crude oil

Trading has been volatile since Russia invaded Ukraine since Russia is the largest exporter of crude oil and fuel. This caused oil prices to reach a 14-year high on March 7th, at well over $100 per barrel. Russian oil has been shunned since the invasion and there has been concerns that crude oil supply could be disrupted. Discussion between Ukraine and Russia about a ceasefire have caused prices to drop, but there is still a lot of uncertainty. Although these discussion are welcome, one researcher stated that "In this current situation, it is hard to see how crude oil prices are not being under-priced".

What has caused this hedge fund retreat?

Charlie McElligott, a stagiest at Nomura has said there is ‘nowhere to hide in the current market. There is a lot of uncertainty in the current market with the sanctions being placed on Russia influencing the worldwide economy. Even the department head of trading at one of Wall Street’s largest banks has said there was “massive confusion” among investors, it seems that even the people in charge are concerned about the current economic climate.

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