Decisions to step away from stocks by everyone from professional speculators to clients of U.S. mutual funds are proving prescient amid the worst rout since 2011.
Hedge funds that aim to profit from global economic trends, a group that oversees some $550 billion, spent July putting on trades that profit from declines in equities, data from Credit Suisse Group AG showed. Owners of mutual and exchange-traded funds yanked $78.8 billion from U.S. shares in the first seven months of 2015, more than in any full year since at least 1993.
For once they got it right: global shares tracked by the MSCI World Index have decreased 14 percent since mid-May, erasing more than $9 trillion in share value. While potentially exacerbating losses over the stretch, the pullout could be construed bullishly in that it eases logjams in heavily traded stocks and leaves money to spend should markets rebound.
“I don’t see a compelling reason to shift our net position here, just because the global uncertainty is something we’ve been concerned about,” said Kevin Divney, chief investment officer at Boston-based Beaconcrest Capital Management LLC, whose main fund went net short U.S. stocks before last week’s rout. “But on the other side of the lens, a lot of our shorts did extremely well so you’d want to buy to cover. From a tactical trading perspective, buying would be there at the edges.”
Anyone who is short stocks has been profiting. A basket of American companies with the most bearish bets compiled by Goldman Sachs Group Inc. decreased more than 8 percent last week, the biggest drop since May 2012 and 3 percentage points more than the Standard & Poor’s 500 Index.
GameStop Corp., a stock whose short interest accounted for 44 percent of it shares outstanding, slipped 5.5 percent over the five days. Chesapeake Energy Corp., with its short interest ratio at 32 percent, dropped 8.3 percent.
It’s welcome news to hedge funds that have trailed the market almost every year since the global financial crisis. The HFRI Equity Hedge Index has gained 8 percent a year since 2009 through July, compared with 18 percent in the S&P 500.
Waves of selling gripped global markets anew Monday as Chinese shares tumbled by the most since 2007, stocks in Germany headed for a bear market and commodities fell to a 16-year low. More than $5 trillion has been erased from the value of global equities since China unexpectedly devalued the yuan on Aug. 11, fueling concern that the slowdown in the world’s second-largest economy is worse than anticipated.
“It looks in the short term a little overdone. I wouldn’t be surprised to see a bit of a turnaround here over the next couple days,” said James Gaul, a portfolio manager at Boston Advisors LLC, which oversees $2.8 billion.