Hedge Funds Bought the Dip as Nasdaq Tumbled Into a Correction

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Hedge funds stepped up buying of technology shares during the Nasdaq 100’s first correction since March, once again warming up to the industry after trimming stakes.

Professional managers that make both bullish and bearish equity bets scooped up internet and software companies on Friday and Tuesday at the fastest rate in five months, according to data compiled by Goldman Sachs Group Inc.’s prime-brokerage unit. Meanwhile, hedge-fund clients at Morgan Stanley increased their exposure to growth and momentum stocks, styles dominated by tech companies, the firm’s data showed.

Having taken a more neutral stance on tech as retail traders piled into the FAANG names and stay-at-home darlings like Zoom Video Communications Inc. and Peloton Interactive Inc., hedge funds took advantage of the Nasdaq 100’s three-day, 11% slump that chopped valuations from levels last seen 20 years ago.

“They’re just riding the wave and believe that with interest rates low and inflation non-existent and with the Fed saying, ‘We’ll let it run a little hot,’ there’s more room to run,” said Chris Gaffney, president of world markets at TIAA Bank. “Is it a bubble and do we continue to inflate that bubble? I think that it can continue to inflate.”

Hedge funds’ conviction in tech shares is echoing confidence by retail investors, who stood firm during the rout and continued to build up positions through stocks and options. The Nasdaq 100 rose as much as 1.5% before erasing gains on Thursday.

The big five — Apple Inc., Microsoft Corp., Amazon.com Inc., Google’s parent Alphabet Inc. and Facebook Inc. — saw net buying for two straight sessions through Tuesday, after being sold in eight of the previous nine days, Goldman data showed. At Morgan Stanley, hedge funds turned to net buyers in tech stocks over the same stretch after selling in August.

While the retreat prior to the selloff helped limit the pain for fund managers, their tech positioning remained elevated — net exposure stood at the 95th percentile since 2010, Morgan Stanley data showed.

The heavy tilt toward tech is one reason that Morgan Stanley is warning clients about the risk in coming months should equity losses deepen and hedge funds’ favorite shares bear the brunt of selling.

Based on the firm’s data, the group’s top 50 popular stocks made up about 38% of the total long exposure, a level that’s hovering near a 10-year high. Gross leverage, a measure of industry risk appetite that takes into account both long and short positions, sat near the top 10th percentile of the historic range, with short leverage way below the average.

“Should the market pull back further, the performance pain will likely be more significant on the long portfolio, but there could be further appetite to add to short exposure,” Morgan Stanley wrote in the note to clients. “However, with gross leverage elevated, there will likely be a limit as to how much funds would add to the short side, unless long leverage were to come off.”

— With assistance by Vildana Hajric

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