New York: You didn’t have to be some dad with an E*Trade account or an ex-manager for Target Corp. shorting the VIX to get burnt. The smart set took its lumps in the downdraft, too.
Days before the S&P 500 Index’s biggest sell-off since 2015, bullishness among hedge funds specialising in stocks surged to the highest in more than three years, according to client data compiled by JPMorgan Chase & Co. The bank looked at a value called net exposure, which subtracts short positions from longs.
Not every big-money trader was caught off guard by the convulsions. Hedge funds operating in the volatility market spent the last several weeks reducing bets against the VIX, the benchmark gauge for equity turbulence. They cut the number of shorts outstanding to the fewest since November 2016, data from the US Commodity Futures Trading Commission show. The data was compiled just before the VIX more than doubled on Monday.
Equities stayed on an unsteady footing Wednesday as volatility that’s gripped global financial markets persisted amid signs that the rise in Treasury yields has yet to run its course. The S&P 500 swung between gains and losses throughout the session before ending lower after heavy selling in the final 15 minutes of trading.
While they obviously weren’t alone, the consequences of aggressive positioning into the rout may be harder to swallow for professional traders whose performance has become an increasingly urgent matter. The HFRI Equity Hedge Total Index, which tracks equity-focused hedge funds, trailed the S&P 500 in each of the past eight years. Lacklustre returns have sparked withdrawals and grumbling about fees.
Net exposure among JPMorgan’s hedge fund clients increased by 1.2 per cent from a week ago to 0.72 on Feb. 1. The next two days, the S&P 500 plunged 6.5 per cent as a rout triggered by a surge in Treasury yields got exacerbated by VIX-related selling.
Clients of retail brokerages were also active before the sell-off. Trades from just two shops — E*Trade Financial and TD Ameritrade — accounted for more than one-third of the volume on the New York Stock Exchange last month. That’s triple levels in 2016.
