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Record Retail Equity Investment as Hedge Funds Scale Back

A divergence in investment strategies is evident as US retail investors ramp up their equity purchases while hedge funds decrease exposure.

New York Stock Exchange
New York Stock Exchange

Retail Investors Show Record Appetite for Equities

Retail investors in the US snapped up nearly $7 billion in equities last week, a near-record level of investment not seen since 2016. This comes even as hedge funds were seen cutting their global equity positions, according to a note to institutional investors from Morgan Stanley.

Betting Big on Exchange-Traded Funds

The Wall Street banking giant observed that retail investors' net purchases were primarily concentrated in exchange-traded funds (ETFs). Individuals also diversified across various sectors, only excluding communication, consumer staples, and utilities.

Year-to-Date Retail Appetite Dips

Despite recent investment surges, the overall retail investor appetite for the year up to July 7 has dipped by 60% in comparison to the first six months of each year between 2016 and 2022. Nonetheless, individuals have net purchased equities worth $80 billion this year so far.

Hedge Funds Reduce Global Equity Exposure

In contrast to retail investors, US-based long/short hedge funds reduced their exposure to global equities. Their gross leverage, which signifies hedge funds' positions on share price fluctuations, fell by 2% compared to the previous week.

Sector-Based Portfolio Adjustments in Hedge Funds

In terms of sector-specific adjustments, hedge funds primarily reduced their long exposure to the pharmaceutical industry and markets in Asia (excluding Japan). However, they increased holdings in consumer-related sectors and Japanese equities.

Market Performance and Hedge Fund Positions

Morgan Stanley, which tracks the positions of hedge funds through its prime brokerage, reported a roughly 1% decrease in US long/short hedge funds last week. In the same week, the S&P 500, Dow Jones, and Nasdaq fell by 1.2%, 2%, and 0.9% respectively.