Hedge funds, powered by computer algorithms, are predicted to offload between $20 billion and $30 billion in stocks in the upcoming two weeks, due to receding stock markets, a note from UBS (UBS) revealed. Such algorithmic hedge funds have transitioned from a bullish to a neutral perspective on stocks. This pivot signals that they are preparing to shift from net long positions for the first time since November 2022, likely causing further stock market declines.
In the third quarter, U.S. stocks witnessed a decrease of 3.6%, marking the initial quarterly downturn in 2023. Investors' concerns over sustained high-interest rates and escalating oil prices, both fueling inflation worries, are attributed to this decline. Notably, CTAs, or Commodity Trend Advisers, base their trades on following equity movements. In contrast to hedge funds that select stocks based on perceived value, CTAs' trading actions often lag behind market shifts since they wait for clear market directions.
The U.S. stock market currently boasts a valuation of about $46.2 trillion, as specified by the Securities Industry and Financial Markets Association. CTAs have exhibited a pronounced preference for the dollar, simultaneously holding short positions in long-term U.S. Treasuries. UBS highlighted that these hedge funds have persistently purchased the dollar throughout September, estimating the total acquisition value to reach between $60 billion to $70 billion.
Throughout September, these hedge funds maintained their dollar-buying spree, with UBS estimating the cumulative buying amounting to $60 billion to $70 billion. Currency trading volumes surged to a record high in September 2022, reaching $7.5 trillion daily, as reported by the Bank for International Settlements. Remarkably, 88% of these trading volumes involved pairings with the dollar.
