Hedge funds could be staging a comeback as short bets post best month since 2010

A trader works in the dealing room of the New York Stock Exchange (NYSE), August 5, 2021.

Andrew Kelly | Reuters

Short selling is booming again after being almost left for dead due to the GameStop mania, rekindling hopes that hedge funds could make a difference in 2021.

The hedge fund short book generated the best alpha since 2010 in July, and is now outperforming the long side of their strategies, according to data from Morgan Stanley prime brokerage. The rebound came after a rocky start to the year when GameStop’s monstrous tightening inflicted enormous pain on short sellers betting against the brick-and-mortar retailer. As the trend of meme stocks spread, hedge funds closed short bets and generally took less risk.

The outperformance of bearish bets is good news for hedge funds, which are starting to regain favor after a decade of poor performance that has driven cost-conscious investors away. After three consecutive years of cash outflows, hedge funds recorded more than $ 6 billion in client inflows in the first quarter, bringing the industry’s total assets under management to a record $ 3.8 trillion, according to the reports. data from HFR.


Estimated assets under management

Note: Data for 2021 extends to the first quarter.

Source: FRH

Estimated assets under management

Note: Data for 2021 extends to the first quarter.

Source: FRH

Estimated assets under management

Note: Data for 2021 extends to the first quarter.

Source: FRH

“Investors are looking to alternative investments for consistent returns to stay in the market after a strong rally to record highs,” said Greg Bassuk, CEO of AXS Investments. “Hedge funds also have the downside protection component against Covid risks and the Fed’s tapering. “

The stars seemed to be lining up for a hedge fund revival. For starters, volatility has made a comeback amid a long list of macroeconomic risks, ranging from a worsening pandemic to the withdrawal of monetary stimulus and slowing economic growth.

Meanwhile, the correlation of stocks has fallen to an all-time low from a peak in March 2020, creating an ideal environment for stock pickers, according to Bernstein.

“It’s easier to pick winners and losers in an environment where stocks aren’t moving in the same extreme direction,” said Sarah McCarthy, quantitative and global equities strategist at Bernstein, in a note.

Hedge funds gained 9.2% in 2021 until the end of July, according to HFR. They are still lagging the market, with the S&P 500 having climbed 17% in the same time frame.

– CNBC Nate ratter contributed to this story.

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