Hedge funds have aggressively bought U.S. stocks over the past two trading sessions, with net purchases reaching their highest level in more than six months, marking a reversal of the previous deleveraging trend. Following the Federal Reserve's release of a more dovish signal, these institutions shifted from net selling to actively going long and massively covered short positions in technology stocks.
An important turning point in the deleveraging trend of the U.S. stock market has emerged: hedge funds have significantly turned to net buying of U.S. stocks over the past two trading sessions, with cumulative purchases reaching a six-month high.
According to data from Goldman Sachs' prime brokerage business, hedge funds recorded net buying of U.S. stocks at 2.2 standard deviations on Friday and 1.6 standard deviations on Monday. The total net purchases in dollar terms marked the largest two-day figure in over six months and were among the highest in the past two years. Although hedge funds had been net buyers of U.S. equities for three consecutive weeks, the intensity of buying was much lower than during the last two days.
This market shift stems from a sharp change in expectations regarding Federal Reserve policy. Market expectations for a 25-basis-point interest rate cut in December surged from 30% a week ago to 85%. Goldman Sachs' economics research team now fully anticipates a 25-basis-point rate cut in December and maintains its forecast of two additional cuts by 2026, which would bring the federal funds rate down to 3.125%.
In this round of buying, single stocks and macro products accounted for 56% and 44% of the net notional purchases of U.S. equities, respectively. Short positions in U.S.-listed ETFs were covered by 2.5% on Friday and 2.4% on Monday, largely reversing the surge in short-selling activity that occurred during Thursday's market reversal.
Technology stocks shifted from heavy selling to becoming the most bought assets.
The information technology sector became the U.S. equity sector with the largest net purchases over the past two trading sessions.
Hedge funds were aggressively selling U.S. tech stocks on Thursday but quickly turned into buyers on Friday and Monday. The buying activity was primarily driven by long positions, supplemented by short covering, with the ratio between the two being approximately 4:1.
Sub-sectors such as semiconductors and semiconductor equipment, technology hardware, and communication equipment led the gains, with most sub-sectors recording net purchases.
Goldman Sachs' US AI beneficiary basket saw significant net purchase inflows on Friday and Monday, primarily driven by mega-cap tech stocks. In contrast, the net activity for the basket of non-profitable tech stocks was relatively muted – notably, the total short interest flow for non-profitable tech stocks has increased for five consecutive trading days and has risen in 14 out of the past 15 trading sessions.
Quality and defensive characteristics continue to be the focus of hedge funds. The buying momentum in the healthcare sector persists, with hedge funds having recorded net purchases for five consecutive trading days and in 15 out of the last 17 trading sessions. The sector's overall allocation and net allocation as a proportion of the total US prime brokerage book are now near a five-year high, standing at the 98th percentile.
Editor/Wendey
