Australian shares are set to edge lower. The US 10-year yield rose 10 basis points to 4.53pc. Follow updates here.
As the cross-asset selloff engulfed Wall Street last week, hedge funds ramped up their bets against stocks while one measure of their market positioning plunged the most since the March 2020 crash.
From retail investors to rules-based systematic traders, appetite for equities is subsiding after a 20 per cent rally this year that’s fuelled by euphoria over artificial intelligence. Fast money investors increased their bearish wagers to drive down their net leverage — a gauge of risk appetite that measures long versus short positions — by 4.2 percentage points to 50.1 per cent, according to Goldman Sachs Group Inc.’s prime brokerage. That’s the biggest week-on-week decline in portfolio leverage since the depths of the pandemic bear market.Co, while Morgan Stanley’s clients cut their net leverage at a pace not seen since last October.
“Client activity has been reflexive, as lower prices have been met with significant de-risking from the trading community and the loss sponsorship from the retail community,” Tony Pasquariello, Goldman’s head of hedge-fund coverage, wrote in a note. “While I’m a believer in the durability of US growth and the exceptionalism of US mega cap tech, from today’s levels it is hard for me to get excited about either the ‘E’ or the ‘PE’ into next year.
A drop in net leverage means the so-called smart money is taking a less bullish stance on equities. Another measure of hedge fund risk appetite is gross leverage, which adds up both long and short positions. That gauge can go in the opposite direction of the net measure when shorts rise — as is the case now. A short-driven build up in gross leverage means hedge funds are increasingly leaning against the stocks and they’re doing it with high conviction.
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