Hedge funds avoid August rally and shift focus to China while September volatility raises concerns
A surge in retail investors’ exposure to US equities has raised red flags among market analysts, with UBS estimating that direct holdings will climb to 265 percent of disposable income in 2025, surpassing the previous high of 243 percent in 2021.
According to Reuters, retail traders now make up more than 40 percent of the US stock market.
Bruno Schneller of Erlen Capital Management cautioned that such stretched positioning could create “a vicious circle of stock selling” if growth slows and speculative demand fades.
He said, “The retail bid is powerful but fragile — when multiples of disposable income are being funnelled into equities, it can extend the cycle, but it also raises the risk of a sharp unwind”.
Hedge funds have taken note of these risks and stayed away from the August rally, even as the S&P 500 gained nearly 2 percent and MSCI’s world stock index held close to record highs.
Data from Goldman Sachs showed funds continued to sell stocks, adopting “a more cautious stance.”
Morgan Stanley reported a 1 percent drop in leverage in both the US and Europe, signalling muted trading activity.
Seasonal pressures also weigh heavily.
Over the past two decades, US stock markets have delivered negative returns in September about half the time. With corporates restricted from repurchasing shares during the month, market stability is further reduced.
Schneller said that “seasonally, volatility tends to rise into autumn, and positioning in systematic strategies is already stretched — so the market has less shock-absorber capacity than usual”.
Reuters reported that bond markets add another layer of fragility.
Omar Sayed, chief investment officer at Porchester Capital, noted that while a Federal Reserve rate cut is anticipated this month, rising government bond yields in the UK and Japan signal vulnerabilities.
“If you look at the 30 years of gilts and JGBs (yield data), they are at new highs — and any crisis in one market will trigger a crisis in another,” he said.
Japan’s 30-year government bond yield is currently above 3 percent, near record levels.
Despite caution in US equities, hedge funds turned to Chinese markets.
Goldman Sachs reported record net inflows into Chinese equities in August, while Morgan Stanley highlighted it as the largest hedge fund buying spree in China since February
