Hedge funds remain on the sidelines, with no choice but to short U.S. stocks

In an environment of high uncertainty, hedge fund confidence has dropped to a historic low, and shorting U.S. stocks has become a consensus.

According to media reports on Wednesday, despite a rebound in the U.S. stock market in April, market uncertainty has led hedge funds to be generally cautious, with positions indicating that institutions are increasing their short bets on U.S. stocks.

Bob Elliott, a former executive at Bridgewater Associates, pointed out that the indicator measuring hedge fund managers' confidence in specific investment strategies fell to a historic low of 10% at the end of March since 2000, but is now showing a slight recovery. Elliott stated:

What we are seeing now is that fund managers are more focused on policy rather than (Biden or Trump's) rhetoric, and the current policy mix clearly presents negative impacts, with the economy potentially weakening further.

On Tuesday, the S&P 500 index rose for the sixth consecutive trading day, marking the longest streak of gains since November. While retail investors are still pursuing a "buy the dip" strategy, the so-called "smart money" is increasingly preparing for further declines in the U.S. market.

Three Major Challenges Lead Hedge Funds to Short U.S. Stocks and Bet on Europe and Japan

Elliott believes that the U.S. faces three severe challenges, and these three factors have not yet been fully reflected in current market prices:

• Federal policies, including tariffs, may suppress economic growth;
• Foreign investors' interest in U.S. assets is waning;
• And policy uncertainty is high.

The report noted that this stands in stark contrast to the situation before and after last year's election, when funds were clearly bullish on the U.S. stock market. However, after the clarity of Trump's policy focus in early February and March, fund managers quickly reduced their long positions and turned to shorting. By April, as market volatility increased, they adopted a more pessimistic stance.

Elliott stated that the investment themes in the market are becoming increasingly clear, with equity strategy managers reducing their holdings in U.S. stocks while increasing their bets on Europe and Japan:

Future weaker growth has not yet been reflected in current stock market earnings growth expectations and valuations. Although the dollar has recently declined, it remains at a very high level, and the decades-long rise of U.S. stocks relative to those of other developed economies has only slightly retreated. Unless the current government makes substantial policy changes, these trends are likely to continue.

The report analyzed that while hedge funds remain extremely pessimistic about small and mid-cap companies, many funds see compelling bullish opportunities in the financial and banking sectors, where the fundamentals have improved and valuations are relatively low.

Notably, according to reported data, emerging market investments have performed outstandingly. In the first quarter, driven by a surge in the Chinese stock market, emerging market investments were the best-performing fund strategy, with a return of 6.3%, while the overall return rate of the hedge fund industry during the same period was only 1.7%