Hedge funds increase bets against US stocks as debt maturity nears

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Hedge funds and asset managers increased their bets against the US stock market to the highest level since 2011, fueled by fears of a possible US debt default and a recession.

Net short positions – bets on falling prices – held in derivative contracts linked to the S&P 500 have risen sharply in recent weeks, according to a Société Générale analysis of a combination of futures positions from the US Commodity Futures Trading Commission.

Investors have raced to protect their portfolios as the US nears a debt default, with President Joe Biden warning Republicans in Congress that failure to reach an agreement to raise the $31.4 lending limit trillion from the government would be a “catastrophe” for the economy.

Despite debt worries and the collapse of several US regional banks in the spring, the S&P is up 8% this year, hitting an eight-month high earlier this week and stoking hopes that a new bull market is already upon us. started on Wall Street.

The market rally “seems out of place given that investors have never priced in a substantial risk of failure to raise the debt ceiling to begin with,” said Marko Kolanovic, a strategist at JPMorgan.

Société Générale described the high level of short positions as a warning signal “too strong to ignore”.

US politicians are trying to finalize a deal on the debt ceiling in the coming days, ahead of June 1, when the United States could run out of liquidity to pay all its financial obligations.

Many managers are also concerned about US stock valuations and the possibility that the Federal Reserve’s rapid interest rate hikes over the past year to try to fight inflation could trigger a recession.

The S&P 500 is currently trading on a multiple of the price to forward earnings of 18.7 times, near the high of its historical valuation range.

“Stocks seem quite expensive to us. Price [to] earnings reports are near an all-time high,” said Kenneth Tropin, president of Connecticut-based Graham Capital Management, which manages $17.7 billion in assets. He said traders at his firm managed a small short position for most of this year, although these have been reduced due to the rally in equities.

“Given a rally led by only a handful of names, relatively expensive valuations in technology companies and large-cap growth stocks, and the negative impact of the credit crunch on corporate earnings, we expect more volatility in the coming months and see the S&P 500 at around 3,800 by December,” said Mark Haefele, chief investment officer at UBS Global Wealth Management.The index was around 4,175 on Friday.

According to Mario Unali, a portfolio manager at investment firm Kairos, many hedge funds have bought individual stocks with strong cash flow, while also betting against the broader market, reflecting their caution.

“Conviction in a full-scale risk rally remains low due to the uncertain economic backdrop,” he added.

Some in the market believe that the problems in equity markets could start to bite later in the year, particularly if interest rates remain higher than markets expected.

Michael Wilson, chief US equity strategist at Morgan Stanley, said an earnings recession is looming in the second half of this year as consumer spending begins to slow and problems affecting regional banks will accelerate the squeeze on liquidity. credit for US businesses.

“Mayor [US equity] the indices are priced for good simultaneous results on multiple fronts, while we believe the risks are high and even rising in some cases,” Wilson said.

“My best guess is that during the second half of the year we could see a nice-sized correction in equities if the Fed disappoints those who believe they will cut rates three times before the end of the year,” Tropin said of Graham.