Hedge funds could be staging a comeback as short bets post best month since 2010

A dealer works on the buying and selling flooring on the New York Stock Exchange (NYSE), August 5, 2021.

Andrew Kelly | Reuters

Short promoting is booming once more after nearly being left for useless as a result of GameStop mania, reviving hope that hedge funds could flip issues round in 2021.

Hedge funds’ short e book generated in July the best alpha since 2010, and now it is outperforming the lengthy aspect of their methods, in response to Morgan Stanley prime brokerage knowledge.

The rebound got here after a robust begin to the 12 months when the monstrous GameStop short squeeze inflicted big ache for short sellers betting in opposition to the brick-and-mortar retailer. As the meme inventory pattern unfold, it induced hedge funds to shut out short bets and on the whole tackle much less threat.

The outperformance within the bearish bets is nice information for hedge funds which might be beginning to come into favor once more after a decade of mediocre efficiency pushed cost-conscious traders away. After three straight years of outflows, hedge funds noticed greater than $6 billion consumer inflows within the first quarter, pushing the trade’s complete property beneath administration to a report of $3.8 trillion, in response to HFR knowledge.


Estimated property beneath administration

Note: 2021 knowledge is thru the primary quarter.

Source: HRF

Estimated property beneath administration

Note: 2021 knowledge is thru the primary quarter.

Source: HRF

Estimated property beneath administration

Note: 2021 knowledge is thru the primary quarter.

Source: HRF

“Investors are turning to alternative investments for consistent returns to stay in the market after a strong rally to record highs,” stated Greg Bassuk, CEO of AXS Investments. “Hedge funds also have the component of downside protection against the risks of Covid and the Fed tapering.”

The stars appeared to be aligning for a hedge-fund revival. For starters, volatility has made a comeback amid a laundry listing of macro dangers, from a worsening pandemic to the pullback of financial stimulus and slowing financial development.

Meanwhile, inventory correlation has fallen to an all-time low from a peak in March 2020, making a super atmosphere for inventory pickers, in response to Bernstein.

“It is easier to pick winners and losers in an environment where stocks are not moving in the same direction in an extreme way,” Sarah McCarthy, international quant and fairness strategist at Bernstein, stated in a notice.

Hedge funds have gained 9.2% in 2021 by way of the tip of July, in response to HFR. They are nonetheless lagging the market considerably, as the S&P 500 climbed 17% throughout the identical interval.

— CNBC’s Nate Rattner contributed to this story.

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