Hedge funds have executed a dramatic repositioning of their holdings in less than a week. The latest data from JPMorgan indicates that the net leverage of hedge funds has plunged to the 8th percentile of the past year's range. This suggests one of the market's most closely watched bearish rationales—excessively crowded positioning—is dissipating rapidly.
According to JPMorgan's prime brokerage data, hedge fund net leverage has receded to the 8th percentile of its one-year range. The firm stated that net leverage has returned to the lower end of the 12-month range and is nearing the average of the past five years. The most pronounced selling pressure was observed in North American markets, primarily driven by the reduction of long positions. This shift has reversed the buying trend that had been in place since late May.
The weekly change in the composite positioning indicator (TPM) swung sharply from being more than +2 standard deviations above its recent market peak to falling below -2 standard deviations this week. Consequently, positioning levels have normalized back into a neutral range.
However, this deleveraging does not signal that market risks have been fully cleared. Exposures to momentum and other high-risk factors remain at extreme levels, indicating that underlying market vulnerabilities persist. JPMorgan noted that despite recent declines in volatility and market sensitivity (beta), hedge funds' net exposure to these factors remains near the elevated levels seen in mid-February 2021.
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