Trend-following hedge funds, also known as CTAs (commodity trading advisers), operate with a systematic approach, aiming to capitalize on significant market trends. Their trading strategies are algorithmic and designed to identify and exploit trends in various financial markets, including equities.
According to insights from Goldman Sachs, these hedge funds are positioned to potentially offload a substantial amount of U.S. equities in the coming month if the stock market continues its downward trajectory. The key indicator for triggering this action is the S&P 500 index falling below the critical level of 5,135 points. Such a drop would signify a shift in sentiment among trend-following hedge funds from a more positive outlook to a negative one, prompting them to initiate sales of equities.
Goldman Sachs’ analysis suggests that if the S&P 500 experiences a decline of 3.2% over the next month, CTAs could be compelled to sell approximately $20 billion worth of companies within the index alone. Furthermore, this selling pressure could extend to global equities, with estimated sales exceeding $200 billion. Should the downward trend persist and the S&P 500 decline further, the total equity sales within the index could reach a significant $42 billion.
The recent decline in the S&P 500, already down by approximately 2.6% since April 11, has been influenced by various factors, including unexpectedly strong U.S. price and sales data and renewed geopolitical tensions. Consequently, hedge funds have been actively adjusting their positions, with net selling of U.S. equities observed for the second consecutive week. This trend was exacerbated by a robust consumer price index report, which surprised investors and cast doubt on the timing of potential interest rate cuts by the Federal Reserve.
In contrast to their reduced exposure to U.S. equities, hedge funds have shown increased interest in Chinese equities, with net buying observed for the third consecutive week. This shift in investment focus reflects changing market dynamics and the pursuit of alternative opportunities. Conversely, hedge funds have been net sellers of U.S. energy stocks, reflecting strategic adjustments in response to evolving market conditions and sentiment.