Key Takeaways
- • Hedge funds unwound positions in October at the fastest pace in more than a decade, with Morgan Stanley noting net market exposure fell about 9% since June, according to The Wall Street Journal.
- • Morgan Stanley's prime brokerage desk said hedge funds have turned underweight the AI trade for the first time since early 2023, describing it as the longest stretch of de-risking in more than 15 years.
- • Retail investors moved the opposite direction, with the Vanguard S&P 500 ETF (VOO), Invesco QQQ Trust (QQQ) and iShares Core S&P 500 ETF (IVV) taking in about $31 billion in net inflows from early October through Nov. 10, per ETF.com data.
- • ETFs drew $44.1 billion in the week ended Oct. 23, and QQQ still took in $2.8 billion on Nov. 5, the day the Nasdaq-100 posted its worst session since 2020.
- • Goldman Sachs prime brokerage data showed 73% of hedge fund buying during a brief late-October net-buying period went into indexes and ETFs, and TD Wealth warned some inflows reflect tax-loss harvesting.
Summary
Stock-picking hedge funds unwound positions in October faster than in any month in more than a decade, according to The Wall Street Journal, which cited Morgan Stanley data showing net market exposure reduced by about 9% since June. More than 40% of hedge funds were flat or down for the year through October, even though the S&P 500 and Nasdaq remained positive on the year.
The pullback was visible across individual managers. Lone Pine Capital, which was up more than 40% in the first half, lost 8.8% in October and was down 7.5% for the year before fees. Samlyn Capital is narrowing its focus to financial stocks, Engineers Gate is closing most of its quantamental business, and Walleye Capital let go of several portfolio managers. Goldman Sachs said hedge funds focused on technology, media and telecom lost more than 4% on Nov. 5 alone, erasing the remaining gains for funds that had been up as much as 24% year-to-date before the summer slowdown.
Morgan Stanley's prime brokerage desk said hedge funds have turned underweight the AI trade for the first time since early 2023 and characterized the period as the longest stretch of de-risking in more than 15 years. The desk also noted that depressed net exposure leaves room for short covering if markets turn, though it could also leave retail investors exposed if hedge funds sell into retail demand.
Retail investors moved in the opposite direction. ETFs took in $44.1 billion in the week ended Oct. 23, led by $6.2 billion into VOO and $2.7 billion into QQQ, when the Nasdaq-100 was about 7% below its peak. Two weeks later the index was down almost 15% before a 6% rally in the week of publication. On Nov. 5, the Nasdaq-100 had its worst day since 2020 and the S&P 500 fell 1.4%, yet QQQ dropped 6.5% and still took in $2.8 billion, its largest single-day inflow since Oct. 30. Fidelity brokerage data showed small investors also bought the 3x-leveraged Direxion Daily Semiconductor Bull 3X ETF (SOXL). Bloomberg's Eric Balchunas estimated roughly $12 billion a day flowed into ETFs over five days, with the top 17 ETFs all equity funds.
Interactive Brokers strategist Steve Sosnick cautioned: "I am concerned that we now have a generation of investors who run into the building when the smoke alarm goes off."
Not all ETF inflows are fresh retail capital. Goldman's prime brokerage data showed that when hedge funds briefly turned net buyers in late October, 73% of that buying went into indexes and ETFs. TD Wealth also warned that some October inflows reflect tax-loss harvesting rather than new money. As of the publication date, the sharp pullback in both the Nasdaq and S&P 500 suggests retail dip-buyers have so far been correct, though the outcome remains uncertain.
The pullback was visible across individual managers. Lone Pine Capital, which was up more than 40% in the first half, lost 8.8% in October and was down 7.5% for the year before fees. Samlyn Capital is narrowing its focus to financial stocks, Engineers Gate is closing most of its quantamental business, and Walleye Capital let go of several portfolio managers. Goldman Sachs said hedge funds focused on technology, media and telecom lost more than 4% on Nov. 5 alone, erasing the remaining gains for funds that had been up as much as 24% year-to-date before the summer slowdown.
Morgan Stanley's prime brokerage desk said hedge funds have turned underweight the AI trade for the first time since early 2023 and characterized the period as the longest stretch of de-risking in more than 15 years. The desk also noted that depressed net exposure leaves room for short covering if markets turn, though it could also leave retail investors exposed if hedge funds sell into retail demand.
Retail investors moved in the opposite direction. ETFs took in $44.1 billion in the week ended Oct. 23, led by $6.2 billion into VOO and $2.7 billion into QQQ, when the Nasdaq-100 was about 7% below its peak. Two weeks later the index was down almost 15% before a 6% rally in the week of publication. On Nov. 5, the Nasdaq-100 had its worst day since 2020 and the S&P 500 fell 1.4%, yet QQQ dropped 6.5% and still took in $2.8 billion, its largest single-day inflow since Oct. 30. Fidelity brokerage data showed small investors also bought the 3x-leveraged Direxion Daily Semiconductor Bull 3X ETF (SOXL). Bloomberg's Eric Balchunas estimated roughly $12 billion a day flowed into ETFs over five days, with the top 17 ETFs all equity funds.
Interactive Brokers strategist Steve Sosnick cautioned: "I am concerned that we now have a generation of investors who run into the building when the smoke alarm goes off."
Not all ETF inflows are fresh retail capital. Goldman's prime brokerage data showed that when hedge funds briefly turned net buyers in late October, 73% of that buying went into indexes and ETFs. TD Wealth also warned that some October inflows reflect tax-loss harvesting rather than new money. As of the publication date, the sharp pullback in both the Nasdaq and S&P 500 suggests retail dip-buyers have so far been correct, though the outcome remains uncertain.
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