Despite many safe predictions, no one knows what will happen at the Federal Reserve on Wednesday, no matter what the impact on the markets will be. Professional investors aren’t waiting to find out.
Particularly among managers who base their strategies on quantitative signals, exposure to stocks and other risky assets has been minimized. Weeks of selling have pushed systemic positioning as measured by Deutsche Bank AG two standard deviations below average levels in data from 2010, among other examples.
Hedge funds have been similarly quick, selling shares at the fastest rate on record for two days through Monday, according to data from the main brokerage Goldman Sachs Group Inc. They are pulling out as implied volatility among assets is at levels not seen in any previous Fed session in over a decade.
All of this is testimony to the growing uncertainty ahead of Wednesday’s Fed meeting, where a half point to a full point increase in the fed funds rate is forecast. Stock prices have stalled in the rush to exit, and the S&P 500 is headed for its worst month since the pandemic sell-off in 2020. Bond turmoil is everywhere, with Treasury yields at two years reaching the highest level since 2007.
“We’re sitting on the bottom and there’s a lot of dry dust, but everyone is running for cash because they’re afraid of runaway inflation,” Benjamin Dunn, president of Alpha Theory Advisors, said by phone. “There are doomsayers out there who say policymakers can’t design what they need to do to lower prices without completely breaking the bond market.”
Anxiety is on vivid display. In the note published on Tuesday, Goldman said that short sales in its hedge fund clients increased “aggressively” in the previous two sessions, with broad-based investment strategies, or macro products, such as exchange-traded funds dominating markets. flows. A gauge of its risk appetite that factors in both bullish and bearish bets, known as gross leverage, hovered near five-year lows, the data show.
It’s not hard to see why sentiment is deteriorating. Throughout the year, any attempt to buy the dip, a strategy that worked for a decade, was met with new lows in the market. Having fallen more than 20 percent from its January high amid concerns that the Fed’s efforts to rein in inflation will cause a recession, the S&P 500 entered a bear market this week for the second time since 2020.
On Monday, as losses spread across major assets, Commodity Trading Advisors, which follow trends and place long and short bets on the futures market, sold about $11 billion of bonds and $21 billion of stocks, according to Charlie’s estimate. McElligott, a cross-asset strategist at Nomura Holdings. Meanwhile, target volatility funds such as risk parity, trimmed shares, cross credit and bonds.
Risk aversion has been so intense that equity exposure among these groups has fallen to the second percentile of the historical range, data compiled by Deutsche Bank shows.
“For systematic strategies, it’s purely a function of how the market is behaving, specifically the sharp rise in volatility,” said Parag Thatte, a strategist at Deutsche Bank. “For discretionary investors, whose positioning is aligned with slowing growth but not a recession, we think positioning will decline as more position themselves for recession.”
Increasingly, anxiety is mounting that the Fed will have to raise rates more aggressively to rein in the highest inflation in four decades at the risk of causing an economic downturn. The two-year and ten-year yield curve inverted briefly this week, signaling concerns that tight monetary policy could have a bigger impact on the economy.
“We’re going to tend to go short in a rising rate environment, especially as we get closer to the kind of reversal point where we’re moving into a more recessionary environment,” Katy Kaminski, chief research strategist at AlphaSimplex, said in a statement. an interview. on BloombergTV. “During those environments, our strategy will tend to be 70 percent short bonds. If we go into that environment, we will see more signs of short bonds in the coming years.”