Macro hedge funds to dump $45 billion in equities, says Morgan Stanley

By Carolina Mandl

NEW YORK (Reuters) - Computer-driven macro hedge fund strategies on Wednesday sold $20 billion in equities and are set to shed at least more $25 billion over the next week after the stock rout, in one of the largest risk-unwinding events in a decade, Morgan Stanley said in commentary to institutional clients on Thursday.

After disappointing earnings reports from Tesla and Alphabet, investors heavily ditched stocks on Wednesday, with the tech-heavy Nasdaq Composite dropping 3.6% in its worst day since October 2022.

"The volatility of the last two weeks started out being very rotational," said the bank, referring to a recent investors' rotation to small- from mega caps. "But that has now morphed into a broad index deleveraging (on Wednesday)."

If volatility persists in the coming days, the sell-off would rapidly increase, Morgan Stanley said in their commentary, declining to comment further. An additional 1% day-drop in global equities could spark sales of $35 billion and macro hedge funds could dump up to $110 billion in a 3% day fall.

The main U.S. stock indexes were positive on Thursday afternoon, after stronger-than-expected GDP data.

James Koutoulas, chief executive officer at hedge fund Typhon Capital Management, told Reuters that even after Wednesday’s sell-off, momentum stocks remain trading above their intrinsic value. Historically, he said interest rate hikes have been followed by economic downturns.

"It seems like investors are betting on bucking that trend," he said in a note to clients.

Hedge funds are turning more bearish, as they are mainly reducing their long positions, or bets stocks will rise, while keeping, and in some cases increasing, bets on shares they believe will fall, according to Morgan Stanley.

Portfolio managers mostly sold shares in the information technology, consumer staples and material sectors.

Goldman Sachs also said its clients increased short positions in the so-called macro products, such as large cap and corporate bond exchange traded funds (ETFs).

PERFORMANCE

Following the market bloodbath, hedge funds' performance ended Wednesday in the red, although overall they were able to pare losses compared to the main stock indexes.

Global hedge funds fell 0.67% on average, according to Morgan Stanley, with equities long/short hedge funds in Americas down the most, 1.04%.

The MSCI All Country World fell 1.67% on Wednesday, while the S&P 500 was down 2.31%.

"Hedge funds are in the middle of the worst drawdown of an otherwise positive year," said Mario Unali, head of investment advisory at Kairos Partners.

(This story has been corrected to fix James Koutoulas’ comments to reflect he said that stocks remain trading above their intrinsic value, not overweight, in paragraph 6)

(Reporting by Carolina Mandl, in New York; editing by Diane Craft)