The shadow of the sharp decline in early August gradually dissipated, and global stock markets quickly rebounded and even ushered in a wave of fun, driven by “interest rate cut deals.” However, in the midst of this strong rebound, hedge funds chose to retreat quietly.

Recently, a report released by Goldman Sachs showed that hedge funds in August were selling stocks at the fastest rate since March 2022. These “smart money” seem to be skeptical about the sustainability of the stock market rebound, and are still worried about potential risks in the future.

“From a risk-return perspective, many hedge funds are on the sidelines and say there are plenty of reasons to be cautious,” said Andrew Beer, fund manager at Dynamic Beta. “The geopolitical conflict situation is quite worrying. The 'fly' (Fly) of the economic situation may also hit the windshield soon.” He hinted that the US economic situation might soon have problems.

Will the rebound subside? Goldman Sachs: Market risk appetite has not recovered, hedge funds are selling off faster

Over the past few weeks, the stock market has rebounded strongly, driven by multiple factors such as weakening concerns about the economic recession, rising expectations of interest rate cuts, and declining volatility.

Goldman Sachs's report shows that since August, the return rate for long and short strategies has rebounded by 0.6%, recovering from a sluggish state of 3.8% at the beginning of the month, and has accumulated an increase of 8.8% since this year. The Nasdaq 100 index has also rebounded by more than 10%.

Despite the strong performance of the stock market, the overall leverage ratio and net leverage ratio declined in August, indicating that market risk appetite did not recover significantly after a sharp reduction in positions in July.

Goldman Sachs pointed out that in terms of capital flows, since August, hedge funds have been net selling global stocks at the fastest speed since March 2022. Among them, short operations in the US and other regions are the main driving force. Looking at a single month, individual stocks and macro products all showed a net sell-off.

The report shows that short selling operations are an important driver of continued sell-offs, particularly in the North American market. North America had the highest net sales in August, and hedge funds were also reducing their holdings of stocks in the Asian and European markets. In the Asian market, the Japanese stock market sell-off topped the list. The region experienced the biggest 10-day cumulative net sale in five years.

Bruno Schneller, managing partner of asset management firm Erlen Capital Management, explained that hedge funds seem to have reservations about the sustainability of the rebound, and they are still waiting for the economy and market landscape to become more clear before making decisions.

According to Goldman Sachs data, hedge funds bought small-cap stocks at the same time as selling large-cap stocks in August. The information technology sector is currently the sector with the highest net sales, mainly due to short operations in the semiconductor sector. Consumer stocks also experienced significant declines, with long sales in the consumer goods sector coexisting with short returns in the necessities sector.

In contrast, in the interest rate cut cycle, hedge funds are increasingly favoring high-dividend stocks when adjusting their portfolios. They are shifting their focus to industries such as energy, utilities, and real estate, which are also receiving net purchases.

In addition to Goldman Sachs, Bank of America analysts also warned about the outlook for the stock market. Bank of America strategist Michael Hartnett pointed out that the Fed's current interest rate cut expectations are more due to concerns about economic recession rather than hopes for a “soft landing,” and historical experience shows that the stock market often crashes under such circumstances.

Hartnett believes that rising inflation and the current state of a weak job market make the prospects for a “soft landing” of the economy even more slim, and interest rate cuts may not necessarily boost the stock market. His statistics revealed that out of Powell's 6 speeches at the Jackson Hole annual conference, the S&P 500 index fell in 5 of the next 3 months, with an average drop of 7.5%.