Hedge funds scale back bets on US stocks as losses surge
Managers step away from risk-taking as Wall Street equities endure longest selling streak since 2011
Hedge funds focused on US equities are pulling back sharply on their bets after the longest stretch of sustained selling in more than a decade left many managers nursing stiff losses.
The S&P 500 index has fallen for six weeks in a row in a tumultuous stretch that on Thursday left Wall Street’s benchmark share barometer down by almost a fifth from the peak it reached at the start of 2022, before a dramatic swing higher on Friday.
Long-short equity funds, which pitch themselves on the ability to protect client money in down markets, have lost 18.3 per cent for the year up to and including Wednesday, according to Goldman Sachs estimates.
The declines have been staggering for funds invested heavily in riskier corners of the market, including lossmaking technology companies, with traders warning that there could be a spate of large redemptions that prompt fund closures.
The sharp pullback has prompted funds that trade with Goldman, Morgan Stanley and JPMorgan Chase, three of the largest prime brokers on Wall Street, to dial back their positions over the past week, according to client reports seen by the Financial Times.
“When you’re seeing daily moves of 2.5 or 3.5 per cent in indexes, those are not just everyday moves being driven by trading volatility,” said Peter Giacchi, who leads Citadel Securities’ floor trading team at the New York Stock Exchange. “There’s obviously deleveraging going on — it’s not just noise, there are clearly people taking risk off.”
Goldman on Thursday reported five consecutive days of declines in gross leverage — a measure of a fund’s overall exposure to stock-price moves — among its US long-short equity hedge fund clients, the largest reduction since it began tracking the figures in 2016.
At Morgan Stanley, the gross leverage of its US long-short hedge fund clients — which attempt to profit on stocks rising or falling — this week fell to its lowest level since April 2020 and was just 15 per cent above a low hit in March of that year, when the pandemic pushed the US into recession. It noted that those hedge funds were again selling stocks but had also added to their short trades, bets that could pay off if a stock or index falls in value.
Executives working in JPMorgan’s prime brokerage unit, which reported similar findings, said there were signs that the US stock market could be close to finding a bottom, but they warned that funds still had room to cut their exposure to the market.
“The market continues to teeter between complete apathy and bewilderment,” Ron Adler, who works on JPMorgan’s trading desk, wrote to clients. “While flows haven’t quite been ‘capitulatory’ yet, we have begun to see some of the more prominent growth players on the long-only and hedge fund side start to finally unwind some of these positions.”
Meanwhile, mutual funds and exchange traded funds that buy US equities have registered nearly $37bn of outflows over the past five weeks, according to data provider EPFR.
Charlie McElligott, an equities derivatives strategist at Nomura, said the outflows had appeared to be driving some of the recent leg lower in stocks, as big fund managers sold stocks to raise cash.
US stocks have tumbled this year as the Federal Reserve has tightened monetary policy in an attempt to rein in inflation that has shot far above policymakers’ forecasts. The central bank has embarked on a path of aggressive interest rate rises that are meant to cool economic growth and in turn suppress rapid price increases.
But coupled with Russia’s invasion of Ukraine and an economic slowdown in China, the move has weighed heavily on investor sentiment and driven a sharp uptick in volatility.
“Hard-landing recession risk fears are again trending as central banks again look behind the curve on what looks set to be sticky inflation,” McElligott said.
Goldman Sachs and Barclays bank invest in Alan Howard’s crypto platform
Bet on digital assets comes despite fall in crypto and values Elwood Technologies at $500mn
Goldman Sachs and Barclays have invested in Elwood Technologies, the cryptocurrency trading platform founded by British hedge fund billionaire Alan Howard, in a fresh bet on the mainstream adoption of digital assets.
The two banks invested alongside venture capitalists Dawn Capital and the venture divisions of German lender Commerzbank and Galaxy Digital, US billionaire Mike Novogratz’s crypto financial group. The round, Elwood’s first outside fundraising, valued the six-year old company at roughly $500mn, according to people familiar with the terms.
Elwood is counting on traditional financial institutions — from hedge funds to banks and family offices — ploughing more money into digital assets despite the sharp fall in crypto assets prices. The market value of the top 500 digital assets is down by more than half from their highs last year, according to CryptoCompare data collated by the Financial Times. Bitcoin on Tuesday dropped below $30,000 for the first time since July.
The Elwood funding round was agreed before the latest weekly downward slide. Founded as a vehicle to manage Howard’s personal crypto fortune, the company provides market data and trading infrastructure to big investors in digital assets.
Chief executive James Stickland shrugged off the drop and called the fundraising “another validation of the longevity of crypto”.
“We’re getting investment from financial institutions that aren’t expecting to get massive returns in 15 minutes. They’re investing in the infrastructure,” he said. “I think it’s a reassurance message.”
The $70mn fundraising cements a change of direction for Elwood, which as recently as 2019 was focused on asset management, planning to offer portfolios of crypto funds for institutional investors. Elwood now sells the tech that it developed in-house to manage its own crypto investments to other clients, said Stickland, who joined the company in 2020 to lead its drive to become a software provider.
“As institutional demand for cryptocurrency rises, we have been actively broadening our market presence and capabilities to cater for client demand,” said Mathew McDermott, global head of digital assets at Goldman Sachs. He added that the investment showed the US bank’s “continued commitment” to digital assets.
Elwood provides a tech platform akin to the Bloomberg terminal or BlackRock’s Aladdin portfolio management system, according to Stickland, which aims to plug into existing trading software at financial institutions to help them manage and trade their crypto portfolios.
In February, the company announced a partnership with Bloomberg to connect its software to the US trading platform’s order management system.
“Unless the infrastructure is there, and you get comfort around the quality of the underlying architecture, then you’re never really going to get the volume to match the opportunity,” said Stickland.
Elwood will remain majority owned by Howard, who had been its principal investor before the deal. The co-founder of the Brevan Howard hedge fund is one of the most prominent UK investors to take the plunge into crypto markets.
Shanghai lockdown exposes global supply chain strains
Knock-on effects from disruptions in China could hit ports in Europe and the US when sea freight starts moving again
Western banks explore asset swaps as a way of exiting Russia
UniCredit and Citigroup are among the groups trying to avoid hefty writedowns
UniCredit and Citigroup are exploring asset swaps with Russian financial institutions as western banks exiting the country scramble to avoid hefty writedowns on their operations, according to people with knowledge of their plans.
The banks are among a small number of western lenders with a significant presence in Russia. Moscow’s invasion of Ukraine and the subsequent international sanctions have forced foreign bank executives to consider turning their backs on the country.
A Financial Times analysis last week showed western banks were already steeling themselves for more than $10bn of losses on their Russian operations.
UniCredit has received several offers from Russian financial institutions to buy its local subsidiary since its chief executive, Andrea Orcel, said in March it was considering pulling out of the country, according to people familiar with the matter.
One offer came from Interros group, the investment business owned by Vladimir Potanin, one of Russia’s richest men and an oligarch who has not been sanctioned by the US, UK or EU, according to people with knowledge of the approach. But UniCredit had rejected the offer out of hand, they added.
The Italian bank has, however, continued to discuss selling its Russian business to a handful of non-sanctioned financial institutions — some of which are looking to expand into Russian banking — though any deal is not close, the people briefed on the talks said.
Russia’s banking sector is undergoing a period of rapid consolidation, prompted by western companies trying to exit the market and domestic businesses suffering under the weight of foreign sanctions.
Interros has already snapped up several businesses, including agreeing to buy French bank Société Générale’s Rosbank subsidiary and a 35 per cent stake in highly rated fintech TCS from Russian businessman Oleg Tinkov.
Meanwhile, VTB, Russia’s second-biggest bank, has received backing from the central bank to take over state-owned Otkritie and RNCB. All three have been hit by western sanctions.
SocGen, which first entered Russia 150 years ago, stands to lose €3.1bn on the Rosbank sale.
UniCredit refused the Interros deal to avoid taking such a hit, said people briefed on the approach. “Why would we hand over the business for just one rouble?” one of the people said.
The Italian bank has said it could lose €5.3bn if its entire Russian business were wiped out.
Citi, which first announced it was trying to sell its Russian retail business last year, and UniCredit have both explored deals where they would swap their Russian operations for the local lender’s foreign businesses, according to people with knowledge of the plans.
UniCredit has been working on deals with non-sanctioned banks where it would swap its Russian loan books for the counterparty’s foreign credit portfolios, according to a person briefed on the arrangements.
This was one of the factors that allowed the bank to reduce its net cross-border exposure to Russia from €4.5bn at the start of March to €3.2bn at the end of April.
But as more Russian banks have been hit with sanctions in recent weeks, those options have become more challenging.
VTB and Sberbank, the country’s two biggest lenders that account for half of its banking assets, were the only two Russian banks with significant foreign operations. But both have been added to western sanctions lists over the past two months and are in the process of closing down their European businesses.
A sale to a non-sanctioned entity, rather than an asset swap, is Citi’s preference. It is having “multiple conversations” with medium-sized Russian banks to sell its consumer and part of its commercial operations in the country, a person familiar with the matter said.
The US lender declined to comment and pointed to chief executive Jane Fraser’s comments earlier this month, when she said it was in “active dialogue” with potential buyers of its Russian operations.
Western banks have also discussed with regulators the possibility of receiving special carve-outs to make deals with sanctioned individuals and companies as a last resort.
“If you can’t sell to a sanctioned person, what is the only option? You go and talk to the people imposing the sanctions,” said a banker involved in plans for one international disposal.
“Basically they have told us we could sell to a certain type of sanctioned person or entity. We probably won’t, but have had the talks, we have the cover to discuss things, we need to explore all options.”
UniCredit and Interros declined to comment.
Barron’s Weekend Summary: Millions of workers who have seized control of their professional lives in the post-pandemic economy and leveraged historically tight labor markets into raises, promotions, and a litany of intangible benefits
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Cover Story:
-Millions of workers who have seized control of their professional lives in the post-pandemic economy and leveraged historically tight labor markets into raises, promotions, and a litany of intangible benefits: more-flexible scheduling, more remote work, cheaper healthcare, subsidized child care. With unemployment close to a 50-year low and nearly two job openings currently available for every one unemployed worker—the largest disparity in the US economy on record by far—American workers are enjoying more power than they’ve had in decades. And the results are piling up.
Interview:
Jean Hynes researches the building blocks of human life and invests in companies shaping the future of healthcare. In July, Hynes became the first woman to lead Wellington Management, a Boston-based firm that oversees more than $1.3T in assets for Vanguard Group and other institutional clients. Its healthcare group manages more than $67B.
Hynes specializes in pharmaceutical and biotechnology companies, and is a portfolio manager of the $49B Vanguard Health CareVGHCX, the largest healthcare fund in the US. She was recently named to Barron’s annual list of the 100 most influential women in US finance for the third consecutive year. Hynes spoke with Barron’s from her Boston office about the outlook for healthcare investing. An edited version of the conversation follows.
Tech Trader:
Historically, companies like Western Digital and Micron Technology, which make digital storage, have been lousy investments. So, at a time of nearly unprecedented tech stock volatility, “you should now buy them both.”
The disk drive business has long featured boom and bust cycles. Demand surged, typically triggered by a spike in personal-computer sales, driving up prices. That spurred the players to boost capacity beyond all rational levels. Overcapacity would trigger price declines, and bankruptcies. A hard-drive industry that once included hundreds of players has been whittled down to three, and just two— Seagate and Western Digital—control the vast majority of sales.
The Trader:
-Andrew Addison, a veteran market technician, proprietor of the Institutional View research service, and a sometime contributor to Barron’s, sees more downside ahead for the Dow Jones Industrial Average, the S&P 500, and the Nasdaq Composite, given the dearth of stocks resisting this year’s selling pressure.
-Since the end of 2019, companies have dealt with lockdowns, supply-chain snarls, rising costs, and higher interest rates. Now they might have to cope with the possibility that they expanded for demand that might not arrive. For example, Amazon.com’s Chief Financial Officer Brian Olsavsky acknowledged that Amazon had “built toward the high end of a very volatile demand outlook,” only to realize that it has an “opportunity to better match our capacity to demand.” Olsavsky used the word “overcapacity,” admitting that Amazon had expanded too quickly.
Features:
-Stablecoins are the bedrock of trading and lending activities, providing liquidity to individual traders, funds, and market makers on both centralized exchanges and decentralized-finance, or DeFi, networks. More than 90% of trading volume in crypto occurs in stablecoins, according to CoinMarketCap. Without stablecoins doing their job—holding their dollar pegs through periods of extreme turmoil—the crypto market may face a loss of confidence, affecting trading activity and prices for tokens ranging from Bitcoin to Dogecoin.
-Carvana, the online car seller, has had its statewide dealer’s license suspended on Thursday after an investigation by the Illinois authorities in response to customer complaints, Secretary of State office spokesman Henry Haupt said in an interview Friday. It is the latest in a series of similar moves in other jurisdictions.
-Shell has some of the most attractive assets in the global energy business, notably the world’s largest liquefied natural-gas business and the biggest network of service stations. But at a recent $55, its U.S.-listed shares trade for just 6X projected 2022 earnings of $9 a share. Exxon Mobil, at $86, fetches nine times estimated 2022 profits, while Chevron, at $164, trades for nearly 11X earnings.
European Trader:
-Steel, essential for making cars and constructing buildings, is closely tied to the economic outlook. Steel prices, having jumped as much as 50% after Russia invaded Ukraine, are predicted to weaken somewhat in the coming months. Inflation, rising interest rates, and geopolitical turmoil are increasing the risk of a recession. ArcelorMittal, based in Luxembourg, also engages in mining and has operations in North America, Brazil, and Africa. Shares have slipped 7.4% this year to 26.05 euros ($27.02). But the average price target among 14 analysts is €43.41. The company’s first-quarter earnings and sales rose on higher steel prices.
Emerging Markets:
Cryptocurrency is in a rough patch right now. But it’s failing in one good way, too—as a mechanism for Vladimir Putin’s Russia to evade war-related financial sanctions. Speculation was rife that Russian oligarchs or defense contractors, severed from most of the fiat banking world, would regroup through anonymous, unregulated crypto transactions. That hasn’t happened in any critical mass. “It has demonstrably played out that crypto is not a sanctions-busting tool,” says Michael Mosier, a former acting director of the US Treasury’s Financial Crimes Enforcement Network, now a senior advisor at Oliver Wyman.
Commodities:
-Prices of soybeans, the key ingredient in tofu, look set to drop this year as supply increases and demand declines. Investors should also benefit from the move.
“We’re set up for potential record yields along with record acreage,” says Shawn Hackett, president of Hackett Financial Advisors. He sees soybean prices fetching as little as $12 a bushel in this fall, 27% lower than the recent price of $16.37.
Streetwise:
Jack Hough has “developed feelings” for Bumble, the dating app, and its stock. Bumble began trading at $76 early last year, and has fallen to $22, costing investors 71% of their money. But who among us doesn’t have flaws? This past Thursday, Bumble gained 27% on earnings, which comes after a 42% jump following last quarter’s report. How can a stock be so giving and destructive at the same time? I’ll tell you how.”
Weekend Papers Summary
NEW YORK TIMES
-The foreign ministers of Finland and Sweden are set to join a meeting with their NATO counterparts on Saturday, another sign that Western allies are uniting against Russia.
-The US defense secretary spoke with his Russian counterpart for the first time since the invasion of Ukraine.
-India said it would ban wheat exports as global prices rise.
-The US Treasury has warned foreign banks against helping Russia evade sanctions.
-America’s network of Black colleges was founded to provide opportunity. For many, it has come to offer something else: a link to a treasured legacy.
-Tattoo artists are considered criminals in South Korea, but they’re thriving underground.
-The stock market has long been producing double-digit returns for investors. But the party has ended and it may be a while before it begins again.
-Elon Musk’s tweets about pausing his Twitter takeover spurred new questions, but his contract with Twitter would make a breakup costly and complicated.
-A judge halted part of a law that prevents doctors from prescribing hormone therapies to transgender youth, but upheld a ban on sex-altering operations.
-Critics of the proposal say the rules are restrictive and would stymie the growth of charter schools, whose 3.6 million students are largely Black and Hispanic.
-The subpoenas for five GOP members of Congress sent a shock wave through a divided Capitol and left lawmakers wondering what’s next.
-A Trump-backed candidate appears to be struggling in the GOP Senate primary, a sign that voters seem less swayed by former President Trump’s guidance.
-Former employees described an NFL franchise bedeviled by executive departures, poor financial management and a raft of firings, payouts and NDAs.
-At a conference, Justice Clarence Thomas also denounced the recent protests at justices’ homes and said conservatives would not adopt such tactics.
-As hundreds gathered at the funeral of Shireen Abu Akleh, a Palestinian American broadcaster, riot police assaulted the people carrying her coffin.
-The confirmation of a third Democrat creates an opportunity for the Federal Trade Commission’s chair to advance efforts to rein in corporate power.
-Protests triggered by rising food prices have been spreading in Iran
“They have no hope, they have no trust in the government and they can’t tolerate the status quo anymore,” one Iran expert said of the protesters in at least six provinces.
-Biden calls on states to devote stimulus funds to police.
Ahead of the midterm elections, President Biden is making a forceful push to show he is a defender of law enforcement.
THE FINANCIAL TIMES
-The FTSE All-World index is on its longest weekly losing streak since the middle of 2008, equaling in duration the decline before the subprime mortgage crisis led to the catastrophic collapse of Lehman Brothers. A late bounce on Friday was insufficient to offset a brutal sell-off earlier in the week.
-Tech companies have been among the biggest losers in the markets. Apple, Amazon, Alphabet and Meta have collectively seen $2.1T wiped off their market capitalizations. Carvana has been one of the worst hit, but it is by no means alone. DoorDash, the US market leader for restaurant food delivery, is down 49% year to date. Affirm, one of the biggest in the previously highly-fancied buy-now-pay-later sector, has crashed 75%. Shopify, the ecommerce operator regularly billed as the most serious threat to Amazon’s ecommerce dominance, is down 67%.
-Soaring inflation and supply chain bottlenecks have begun to crack the $1.5T US junk bond market, as the lowest-quality borrowers show signs of stress.
-In a move that could undermine Turkey’s efforts to strengthen ties with the US and Europe in the wake of Russia’s invasion of Ukraine, Erdogan — whose country has been a NATO member since 1952 — on Friday said he could not take a “positive view” of the two nations’ potential bids for membership.
-US defense secretary Lloyd Austin called for an “immediate ceasefire” in Ukraine during his first phone call with his Russian counterpart Sergei Shoigu since the war began almost three months ago, as western allies ramped up direct talks with Moscow.
-Elon Musk on Friday tweeted that he was pausing his bid as he awaited further information to confirm whether the social media company’s quarterly estimates of its fake accounts were accurate, sending Twitter shares falling and raising questions about what, exactly, Musk meant.
-Richard Broughton, director of research at Ampere, said that although there was an increase in churn rates at the start of the year, “there is no strong evidence to suggest that customers are being pulled away due to interest in other [streaming video] services”. The data suggest that a combination of higher inflation and a weakening stock market prompted consumers to tighten their budgets.
-The world’s largest carmakers have warned supply chain disruptions and higher raw material prices threaten the rollout of electric vehicles, even as demand for battery-powered models vastly exceeds manufacturers’ current production capacities.
-Apple supplier Foxconn reported its highest first-quarter net income in eight years as the world’s largest contract electronics manufacturer is gaining market share from rivals hit hard by China’s brutal pandemic lockdowns.
-Sheikh Khalifa bin Zayed al-Nahyan, the United Arab Emirates’ president and ruler of oil-rich Abu Dhabi since 2004, has died aged 73, with his powerful brother set to become the Gulf state’s next leader.
-Australia’s defence minister Peter Dutton has accused China of committing an “act of aggression” after a People’s Liberation Army naval vessel came within 50 nautical miles of a naval communications center.
-Grain traders, food companies and governments have been keeping a close eye on supplies since Russia’s invasion of Ukraine disrupted farming in the country, one of the top five wheat exporters. The USDA predicted on Thursday that Ukraine’s wheat production would fall by a larger than expected 35% per cent from the year before, to 21.5M tons.
-UK fish and chip shops are branching out into lesser-known species, such as hake or sea trout, and offering smaller portions, as the rising price of often Russian-caught fish pushes makers of the classic British meal to the point of closure.
THE NEW YORK POST
-Three people were shot, including a 16-year-old girl, outside of the Bucks game in Milwaukee on Friday — sending panicked crowds on the street sprinting for their lives.
-President Biden is calling for an investigation of baton-wielding Israeli police who charged into the funeral procession for American Al Jazeera reporter Shireen Abu Akleh — after departing White House press secretary Jen Psaki called the incident “deeply disturbing.” Israeli authorities said they rushed into the Jerusalem crowd — nearly causing Abu Akleh’s coffin to fall to the ground — after Palestinians threw rocks. The incident occurred just before a closed-door meeting at the White House between Biden and Jordanian King Abdullah II.
-“A Twitter short seller gloated on Friday after Elon Musk pumped the brakes on his $44B bid to buy out the social media site with a bizarre tweet that claimed negotiations were ‘on hold.’” Short-seller Hindenburg Research had written Monday that Musk “holds all the cards” in the deal and could threaten to walk away in order make the company’s board agree to a lower purchase price.