(Bloomberg) -- After months of caution in the run-up to the US presidential election, hedge funds have emerged as big buyers of US stocks.
Hedge funds’ gross trading activity, which includes long and short wagers, jumped by the most in seven months on Wednesday, with a ramp-up in long positions responsible for most of the move, data compiled by Goldman Sachs Group Inc.’s prime brokerage show. The buying came as they covered short bets across large-cap and small-cap exchange-traded funds.
Going into the US election, hedge funds did what they typically do ahead of big macro risk events: took profits, covered short bets and lowered leverage. As the risk of a contested election that could trip up the stock market didn’t materialize, the group piled into sectors that could benefit from Donald Trump’s return to the White House - large-cap banks, health maintenance companies, domestic industrials and payments firms, data compiled by Morgan Stanley’s prime brokerage show.
“Hedge funds think that Donald Trump will continue low tax and low regulation policies and managers are just expressing their confidence by buying again,” said Jonathan Caplis, chief executive officer of a hedge funds research firm PivotalPath.
The group’s equity buying was swift but not ubiquitous. While small caps emerged as one of the winners after the election, surging almost 6% on Wednesday and outperforming megacaps, fund managers sold them by the most since the start of the third quarter. “We have seen very limited appetite to increase ownership across small-caps,” Morgan Stanley’s analysts wrote in a note to clients on Thursday.
The S&P 500 has climbed 3.3% since Tuesday’s close and has posted 49 records this year, driven by investors’ optimism about the resiliency of the US economy, strong corporate earnings and the beginning of the rate-cutting cycle from the Federal Reserve.
While hedge funds are participating in the stock-market rally, that may not last long as some money managers may prefer to lock in profits before the calendar flips over for the new year, said Calpis. PivotalPath’s US Equity Long Short Index is up 10% this year through October, in the top 70th percentile of rolling 10-month returns going back to 2010.
“A lot of the managers we spoke to after the election think that the market can get quite frothy and you may see hedge funds taking profits again because they’re going to get nervous about how sustainable the rally is,” Caplis added.
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