With just over an hour left until the Fed’s latest announcement, traders are hunkering down ahead of what could be a very volatile market response
While there is certainly the possibility that the Fed will make some unexpected announcement following today’s FOMC meeting, especially with consensus rapidly shifting to expect Powell to announce some form of “QE Lite“, in the form of bond purchases, i.e., POMO, thus leaving the door open for significant disappointment if the Fed fails to address the repo market fireworks, a just as critical factor will be hedge fund positioning headed into today’s announcement. After all, if there is anything last week’s quant quake showed is just how painful the unwind of extremely crowded positions can be even without a clear catalyst.
So with that in mind, what is hedge fund positioning going into the Fed meeting?
Luckily, that is the topic of the latest note from Goldman’s Prime desk, which makes the following observations:
- Trading Flows: Posture remains bullish driven by continued long buys and recent short covers.
- Leverage Ratios: Equity L/S Gross and Net are at multi-year highs (driven in part by recent price gains).
- Regions: All regions net bought MTD, led by rotation back into US equities.
- Sectors: HFs are positioning for continued rally in US Cyclicals, though Banks L/S ratio is still near a multi-year low.
- Factors: Equity LS funds are less net long Momentum, and less net short the Value factors following recent price reversals.
What this shows is that while not at absolutely extreme levels, contrary to conventional wisdom, and Marko Kolanovic’s repeated claim that hedge funds are underinvested, the 2 and 20 crowd is not only tilted bullish, but is quite bullish and with multi-year high net leverage across most sectors and regions (with bank stocks perhaps the only exception), with slightly less net long exposure in Momentum and less short in Value following the recent quantastrophe.
This means that should Powell be less dovish than consensus expects, and again recall consensus now expects Powell to go so far as launch bond buying/POMO/QE (lite), the risk of a substantial market disappointment if Powell says the wrong word, is quite acute.
Here are some additional observations on this topic in visual form:
Trading Flows: Posture remains bullish anchored by continued long buys and recent short covers
Leverage Ratios: Equity L/S Gross and Net at multi-year highs (driven in part by price gains)
Regional Flows: All regions net bought MTD, led by rotation back into US equities
Sector Flows: HFs are positioning for rally in US Cyclicals, though Banks L/S ratio is still near a multi-year low
Factor Exposures: Equity LS funds less net long Momentum, and less net short the Value factors following recent price reversals