Hedge funds and other sophisticated investors were caught off guard by last week’s powerful rebound in stocks and bonds, with many missing out on the best week for markets this year.
Data from Goldman Sachs Group and the Commodity Futures Trading Commission showed that heading into last week, hedge funds had largely shunned stocks, while ramping up bets against Treasury bond futures to the highest level in more than 15 years. After being caught off-sides, many funds were forced to chase the market higher last week, potentially saddling them with losses as they closed out short bets.
As of Oct. 31, the latest data available, leveraged funds, a category that is seen as a proxy for hedge-fund positioning, had increased their net short bets against U.S. Treasury futures to the highest level since 2006, according to CFTC data aggregated by Bloomberg.
Aggregate net-short positioning in six different types of Treasury-linked standardized futures contracts had surpassed 6 million contracts, the data showed.
Meanwhile, data from Goldman’s prime brokerage showed hedge funds had dialed back their holdings of U.S. stocks to the lowest level in 11 years as of late October. Goldman’s prime brokerage services many of the world’s largest hedge funds.
Goldman data also showed trend-following funds called Commodity Trading Advisors, better known as CTAs, had finished October heavily net short stocks, according to Goldman data.
In a note from Friday, Goldman’s prime desk said that hedge funds bought U.S. stocks at the fastest pace since December 2021 last week as the sudden turnaround that followed the Federal Reserve’s November policy meeting forced them to either play catch up, or to close out short bets at a loss.
That many of the world’s most sophisticated investors were caught off-guard by last week’s rally shouldn’t come as a surprise. Veteran market-watchers have long considered positioning and sentiment data to be a counter-indicator. That means when optimism or pessimism becomes too stretched, it often signals a reversal is imminent.
The Dow scored its biggest weekly percentage gain since October 2022, while the S&P 500 and Nasdaq each saw their strongest weekly jump since November 2022, Dow Jones Market Data showed.
In the bond market, the yield on the 30-year Treasury bond
fell 27.3 basis points, the biggest weekly decline since the period that ended on March 6, 2020. It traded at a three-week low of 4.750% Friday afternoon in New York.