Investing.com — Hedge funds experienced a prosperous year in 2024 with an average global gain of 12.1%. Equity Long/Short (L/S) managers are the leaders, with several other strategies also delivering double-digit returns, according to Goldman Sachs.

This performance occurred in the context of increased market volatility and a sharp increase in long-term rates at the start of the year. Total Gross leverage rose to unprecedented levels, driven by higher short exposures. Last month, hedge funds cut Net leverage at the fastest rate since mid-2022, implying a more conservative approach. This trend is consistent with other sentiment indicators such as the funding spread and recent QuickPoll survey findings.

At the same time, US Exchange-Traded Fund (ETF) shorts rose for four straight weeks, marking a 24% month-over-month increase. US single stock shorts have also risen for 12 consecutive weeks (22 of the last 24) in the Prime book, without a significant de-risking episode since July of last year.

In January, almost all regions saw net sales, mostly in North America and, to a lesser degree, Europe. All Developed Markets (DM) in Asia experienced net selling, albeit modest in magnitude. In contrast, net flows differ across Emerging Market (EM) regions. Chinese stocks have seen a slight increase in net allocations over the past few weeks, but remain below the five-year average, sitting at 14 percent.

Hedge funds have moved significantly from the US Technology, Media, and Telecom (BCBA:) (TMT) stocks in the second half of 2024. However, recent flows suggest a potential shift in sentiment, with long buying outweighing short selling. in recent weeks. The so-called “Mag7” stocks now collectively account for approximately 15.5% of total US Net exposure, which is still at its lowest level since mid-2023 despite rising to a record 21% by June 2024.

Healthcare emerged as the most net bought sector so far in January, driven by long-term buying in almost all subsectors. Sector positioning remains relatively light, with Gross and Net exposures close to a one-year low. Within Cyclicals, was the most net bought sector at the start of the year, although net flows have been somewhat volatile since the US election. Despite the recent surge in , managers aggressively sold Energy stocks at the start of the year, driven by high sales.

From a factor perspective, Momentum performance in hedge funds has seen little change in recent months, remaining roughly in line with the five-year average. In contrast, exposure to the Market Sensitivity factor, an indicator of appetite for higher beta stocks, has fallen sharply and is now near a five-year low, suggesting a more defensive stance in early 2025.

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