Alpesh Patel

Hedge Funds During the Stock Market Moves

Updated: Nov 15, 2023

The stock market has taken a beating in 2022, following a spectacular run in 2021. As of August 2021, the S&P 500 was down 13.8% since the beginning of the year, while Nasdaq had fallen by 21.7%.

It's, however, common for investors to experience wild swings in the stock market, especially in the first quarter after a strong year. The political and economic environment in the first quarter of 2022 was far from ideal, making it difficult for investors to maintain their bullish positions.

Hedge funds have been caught in the same downdraft. According to HFR, a data provider tracking the industry, the average hedge fund lost around 5.6% in the first six months. This is in line with the losses experienced by the broader stock market indices.

So, how are hedge funds faring in this challenging environment?

How Are Hedge Funds Doing?

Despite the losses, some hedge funds have been able to protect their investors from the full brunt of the market decline. This is because they typically use a variety of investment strategies that help to mitigate risk. For instance, some hedge funds use short selling to bet against stocks that they believe are overvalued.

The larger hedge funds managed to tilt their portfolios to take advantage of the market moves. For instance, according to HFRI Asset Weighted Composite Index data, the top-performing hedge funds gained 1.6% in the first half. This was spectacular, given that S&P 500 was down over 10%.

But even as the market continues to experience wild swings, half the allocators in the U.S. say they will continue to increase their allocations to hedge funds, according to the Alternative Investment Management Association. This is a new twist as it was generally believed that investors would be pulling their money out of hedge funds for the past three years.

What Are Hedge Funds Buying?

One thing you have to give to hedge funds, they are nimble. Their resistance to change and to be early movers has served them well in this market. And they have been quick to take advantage of the market conditions by making some smart investments.

2022 started off with a lot of uncertainty. A recession seemed imminent, and there was a lot of talk about inflation. But the hedge funds quickly adapted and started buying assets that would perform well in an inflationary environment. Here are some of the assets that hedge funds have been buying:

Lockheed Martin: Since the outbreak of the Ukraine-Russia war in 2022, NATO has been beefing up its air capabilities in Europe. This has led to an increase in demand for Lockheed Martin's products and services.

Home Depot: The home improvement retailer has been a big beneficiary of the stay-at-home trend that started in 2020. With more people working from home and spending more time at home, they are undertaking more home improvement projects.

United Health Group: The health insurer has been a big winner from the Affordable Care Act. As more people have gained health insurance, they have used United Health's services.

Other highly rated stocks that hedge funds have been buying include Coca-Cola, PepsiCo, The Southern Company, Shell plc, Newmont Corporation, and more.

What Is Hedge Funds' View On Market Bottom?

Picking the bottom of the market is always a difficult task. And it's even more difficult when the market is as volatile as it has been in recent months. But in the past month, S&P 500 has staged a strong rally, gaining 10%, while the Nasdaq has gained 15%.

With geopolitical risks such as the Ukraine-Russia war, commodities such as oil and other energy products, and the recent interest rate hike by the Fed, there is still a lot of uncertainty in the markets. So, are we at the bottom? Some hedge fund managers, we're yet to see the market bottom. Francois Savary, the Chief Investment Officer at Prime Partners, said that "there are still too many unknowns in the market." He added, "we could see further downside before we reach the bottom." According to Savary, the factors that led to the recent rally in July are not enough to sustain the rally.

Is It the Bottom?

So, are we at the bottom? It's hard to say. The market has been highly volatile, and there are still a lot of unknowns. However, the fact that hedge funds are still buying stocks and increasing their allocations to hedge funds suggests that they believe there is more upside potential in the markets. Only time will tell if they are right.