Hedge funds: Hedge funds eliminate risk dependence at the end of a crazy year for stocks
The big sellers in December were hedge funds, which, chastened by backlash bets on top-flight software companies, spent the month cutting back on high-momentum trades. This helped make it one of the most volatile year-endings for large-cap tech over the past decade, with the absolute size of closing moves in the Nasdaq 100 reaching around 1.4%.
As a three-day rally restored order to the now 26% higher S&P 500 in 2021, doubts remain about Omicron’s path and how central banks will tackle inflation. The rebound that took the index to an all-time high followed a period of liquidity building up and retail investors, the die-hards who once flocked to bullish options for quick profits, worried about the decline.
“With risk having been significantly reduced and investors now looking beyond omicron, there is now a lack of an offer to sell as the dynamics have changed,” said Eric Johnston, head of equity derivatives and investments. multi-active products at Cantor Fitzgerald. However, he believes, the rally may be short.
“The bull market as we knew it, I think, is over,” said Johnston. “The system’s liquidity drain and the Fed’s tighter overall policy will be a headwind for risk taking.”
Surprisingly strong earnings and optimism about the economy have propelled the S&P 500 to nearly 70 all-time highs this year, on course for the second-best annual record of all time.
Signs Omicron may not be as deadly as other strains of the virus have clashed with continued news of business closures and global travel restrictions threatening growth.
A newly hawkish Federal Reserve also adds to the lack of conviction that characterized December. The S&P 500 has alternated gains and losses each week, each with moves exceeding 1%.
For those who have watched the S&P 500 double in 20 months and are worried about bubble valuations, rising skepticism may be a welcome development, putting the market on a healthy footing. To opponents, all the caution suggests that the skeptics may have been swept aside and that a bit of good news could spark market gains. JPMorgan Chase & Co. thinks so. Strategists led by Marko Kolanovic have predicted a strong recovery in the new year, as positions reverse the bears.
Avoiding risk now could be a mistake, says Andrew Slimmon, senior portfolio manager at Morgan Stanley Investment Management.
“It’s too early to turn bearish, to think the market is down because corporate fundamentals are going to continue to be strong,” Slimmon said in an interview with Kailey Leinz on Bloomberg TV. “There will be opportunities to take advantage of what the market offers, but you have to be prepared to go against the grain, and that means taking more risk here today.”