If you’ve been following me for some time, you know that I often say, “Follow the big money!” Massive institutions have dozens of analysts on staff whose job it is to figure out where markets are headed and trade accordingly. Well, once again, some big hedge funds have foiled the markets with a big short position and made a ton of money in the process.
While it’s important to follow them for clues as to what is – or may be – happening in the markets, don’t try to follow their path. They’re ahead of the game, which means you’ll always be late.
Let’s look at these funds’ recent wins and what it means for the markets.
Hedge funds leave us lots of clues
After a nice bear market rally that saw the SPX500 tag the 200 ma at 4325, stocks turned down more than 8%. Yet a report came out stating that hedge fund shorts are back near their highs of mid-June. Many thought the report was a hoax.
First of all, hedge fund managers are (collectively) some of the smartest and most successful investors and traders out there who often produce strong results for their clients. The alpha, or excess return over risk-adjusted market returns, they consistently produce is due to timing, stock selection and precision, position size and good risk management. Hedge funds are not managing billions of dollars by accident. They have a proven track record of success.
I get the skepticism, though. In 2021, hedge funds were ridiculed due to some shoddy short plays with “meme” stocks like GameStop and AMC. Many funds lost a lot of money on ridiculous short squeezes.
But the situation this summer has been different. On June 16, the media reported that hedge funds had their lowest gross exposure to stocks in over decade. Meanwhile, their short positions were elevated. Small investors (and some large ones) saw this as a vulnerability. How could these funds could still be short after the stock market suffered major collapses in May and and June? Buyers saw an opportunity and came back after a six-week strike to push markets higher by more than 15% over a two month period.
The short positions hedge funds had on were smashed, and it looked like they made another big mistake. They did not! Fund managers covered their shorts but not before booking nice gains. How? Well, they put on those short positions well before the markets took a nosedive.
When the SPX 500 recently tagged the 200 ma, it was reported hedge fund short positions were up substantially again. The rationale made sense – a hawkish Fed, slowing economy and continued inflation – but headstrong bull market players did not see it that way. Once again, hedge fund managers are winning, as they revel in their recent short position gains.
What does this all mean? Well, fund managers are betting against the markets. They don’t expect things to improve anytime soon.
Just don’t imitate them
Because you don’t have access to the same data as these big funds, don’t try to imitate them. Let them take the risks while you follow the charts and technicals and look for high-probability trades.