In June, hedge funds sold stocks in most parts of the world, but they bought stocks in Europe. North American hedge funds were small net sellers of stocks, and long/ short equity funds drove the bulk of the selling, according to data from Morgan Stanley. The firm also found that the buying in Europe was the highest since February as long/ short equity and quant funds drove most of the buying.
Hedge fund leverage close to peaks
In a recent report, Morgan Stanley strategist Katy Haber and her team said that net leverage was at or near peaks across all strategies. However, they did start to see some shifts across certain strategies in positioning. Going into the second half of the year, hedge fund positioning was still elevated gross and net.
The Morgan Stanley team found that net leverage has been above the 95th percentile since 2010 in every strategy, demonstrating how bullish hedge funds are. On the gross side, U.S. long/ short equity, multi-strategy and macro, and event-driven funds remain near peak leverage. However, European long/ short equity and Asian funds have seen their gross leverage decline in recent months, including declines of 7% and 3%, respectively, last month.
Selling single names, buying ETFs
Hedge funds were net sellers of stocks in North America last month, but flows were mixed according to product type. Funds sold single-name stocks throughout the month but were net buyers of exchange-traded funds.
Morgan Stanley found that the net selling was driven by an 80/20 split between short selling and sales of long positions. Communications Services, Financials and Real Estate were the most sold sectors, and long/ short equity funds were the primary net sellers and the main drivers behind last month’s long reductions.
Hedge funds adding to longs drove the net buying of ETFs. Long/ short equity and quant funds made up the bulk of the net ETF buying.
Long alpha still recovering in North America, short alpha still lagging
The Morgan Stanley team found that long alpha continued to recover last month after a difficult time in early May. The spread in North America ended June up 1.9%. Long positions in Utilities, Materials, Energy, Communications Services, Financials and Industrials were the best performers.
However, short alpha offset almost all the positive spread from the long side, ending the month down 1.9%. Communications Services, Healthcare, Materials, Energy and Industrials drove most of the negative short alpha. The short alpha is down 7.9%, while long alpha is down just 5.5%.
Communications Services was up 2.7% in June, outperforming the S&P 500’s 2.3% return. However, the sector still saw one of its most significant months of net sales in recent years, so net exposure to the sector ended the month close to its lowest level in 12 months. Morgan Stanley said the net selling was entirely due to long selling because short flows were paired off. Long/ short equity funds accounted for about 80% of the net selling, and quant funds accounted for the rest.
Hedge funds sold every industry in Communications Services, led by Interactive Media & Services and Media. Despite that, funds remain overweight the sector; however, the metric has fallen to the 55th percentile from the 94th percentile as of mid-March.
Europe was the most net bought region last month
In June, hedge funds were net buyers of European stocks, mainly due to long additions, although there was also some marginal net covering of shorts. Morgan Stanley said funds had been steadily re-grossing across European stocks since February on both the long and short sides. However, short activity has paired off since mid-May, resulting in a steady net positive flow.
Like in North America, flows in Europe skewed toward growth over value. Hedge funds were net buyers of growth and net sellers of the book-to-price factor, a proxy for EU value.