Hedge Funds Continued to Be Net Sellers After Fed Meeting, According to JPMorgan

Hedge funds (HFs) have continued to be net sellers following the Federal Reserve’s recent rate cut, according to a report from JPMorgan. Despite initial expectations for a shift in market behavior, the selling pressure that began prior to the Fed’s announcement persisted throughout the week.

In the last five days, hedge funds recorded a -1.3 z-score, indicating further de-grossing even after the Fed’s initial interest rate reduction in years. Meanwhile, gross and net leverage levels among funds remained largely unchanged from the previous week.

JPMorgan noted, “For all the anticipation and speculation leading up to the start of the easing cycle in the US, investor behavior has seen little change.” Retail investor activity remained low, showing muted single-stock flows and only slight variations in exchange-traded fund (ETF) movements. In the options market, call/put ratios edged toward positivity, and there was some buying activity in futures.

Selling pressure in the U.S. tech sector resumed, with hedge funds particularly focused on the “Magnificent 7” stocks and technology hardware. The flows for these stocks remained erratic, with hedge funds adopting a tactical trading approach—buying dips in early August and early September, and then selling during rallies.

In contrast, retail investor flows in Nasdaq 100 stocks have begun to recover from recent lows, alongside an increase in retail call option volumes. These metrics had peaked in July amid a surge in technology, AI, and cryptocurrency stocks, and a rebound in retail activity could support the tech sector moving forward.

Internationally, hedge fund flows showed a mixed picture. In Europe, hedge funds continued to sell off Consumer Discretionary and Industrial sectors for the second week in a row, alongside defensives such as Household & Personal Products, Telecom, and Utilities, which also faced sell-offs due to underwhelming performances.

However, in Asia, hedge funds reversed earlier selling trends, particularly in China, Taiwan, and Hong Kong stocks, which experienced notable buying activity. South Korea saw minor net selling, while flows in Japan remained neutral.

Globally, funds added more short positions than long ones over the past month, with shorts at +1 z and longs at -0.5 z. Nevertheless, hedge fund performance has shown some recovery recently, especially within Equity Long/Short funds.

Looking to the future, the institution doesn’t anticipate that current positioning will hinder a continued rally in the markets. However, the near-term outlook appears mixed, influenced by factors such as lackluster enthusiasm from hedge funds, subdued seasonality, and mixed data points from the prior week.

Ultimately, JPMorgan concluded, “We still believe dips will likely be bought if the macro backdrop remains supportive, and history suggests a tendency for further gains as we approach year-end.”