Long-Only Managers Shift Gears: Tech Stocks See Inflows as Hedge Funds Sell Off – What This Means for Your Investments
Long-only managers maintained their buying momentum last week, according to a Tuesday note from Citi strategists.
Previously, Citi noted that long-only managers had resumed buying for the first time in seven weeks, initially targeting defensive sectors. However, this past week saw a notable shift, with significant inflows into Tech stocks.
Additionally, long-only managers increased their positions in Financials, Consumer Discretionary, Health Care, and Industrial sectors, while reducing their exposure to Utilities, Consumer Staples, and Communications.
Conversely, hedge funds were net sellers across almost all sectors, with the most significant outflows from Tech, Financials, Materials, and Energy.
"The only sector net bought by hedge funds last week was Communications," Citi strategists highlighted.
They also noted that the Stagflation and Goldilocks correlations, where Tech is the dominant sector, appeared to be bottoming out, similar to the drawdown witnessed in the second half of April earlier this year. This trend seems to be unfolding as expected, with both correlations rising this week as the "Overheating" trade theme diminished.
Moreover, the “Recession early” correlations have increased alongside the defensive sector positioning observed in recent weeks, while “Recession late” correlations, often capturing recession trades after the worst has passed, have also seen an uptick.
U.S. stocks closed slightly lower on Tuesday, ending their recent winning streak as the market awaited the upcoming Jackson Hole Economic Symposium, which begins on Thursday.
All three major U.S. indexes—the Dow Jones Industrial Average (DJIA), the S&P 500, and the Nasdaq—dipped, halting a multi-session rally that had seen the equities market recover from a sharp decline sparked by recession fears.
Breaking It Down: What This Means for You
- Long-Only Managers: These are investment managers who only buy stocks and do not short-sell. Their recent activity indicates a shift towards Tech stocks and away from more defensive sectors like Utilities and Consumer Staples. This could signal growing confidence in the economy's resilience or expectations of tech sector outperformance.
- Hedge Funds: These funds are more flexible and can bet against (short-sell) sectors they believe will underperform. Their selling off of Tech, Financials, Materials, and Energy suggests a more cautious or bearish outlook on these sectors.
- Sector Correlations: Terms like "Stagflation" and "Goldilocks" correlations refer to economic conditions. Stagflation is a period of slow growth and high inflation, while Goldilocks is a balanced period with moderate economic growth and low inflation. Seeing Tech stocks bottoming out in these scenarios can provide insights into market sentiment and economic expectations.
- Market Outlook: The slight decline in major U.S. indexes suggests market participants are cautious ahead of significant economic events, like the Jackson Hole Economic Symposium. This event could influence market directions based on the Federal Reserve's comments on future economic policies.
Impact on Your Finances:
- For Investors: If you are investing in mutual funds or ETFs managed by long-only managers, you might see an increased allocation to Tech stocks.
- For Market Timing: If you are trying to time the market, be cautious. The mixed signals from long-only managers and hedge funds suggest uncertainty.
- For Economic Forecasting: Understanding these trends can help you gauge where the economy might be headed, aiding in making informed investment decisions.
In essence, while the market shows signs of cautious optimism, the mixed actions between long-only managers and hedge funds indicate that the path forward might be volatile. Being aware of these movements can help you navigate your investment strategy more effectively.