Hedge funds’ European stock binge masks bearish retreat

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LONDON, Jan 27 (Reuters) – Hedge funds in January picked up the most European stocks compared to U.S. equities for 20 years, but investment banking research published this week showed that this may be more of a bear retreat than a bull run.

Much of the buying was by algorithm-driven funds that have backed out of their previous bearish bets on European equities, according to a JPMorgan note published this week and seen by Reuters on Friday.

European stocks are up about 6% so far this month, lifted by China’s reopening and a milder-than-expected winter that dampened the effect of the energy shock.

Hedge funds splurged on sectors such as steel, airlines and retail, in what the bank said was largely short-covering – undoing a bet that was made in the past that asset will weaken.

They were not bullish at all. Hedge funds took short positions in oil and gas, UK mining companies and European banks, JPMorgan said.

But sterling’s recent strength against the dollar has encouraged global hedge funds to buy the stock of domestically focused UK companies, the bank said. Sterling is up around 2.5% so far this month.

US equity hedge funds started 2023 with 18% less leverage than they had in 2022. This money is usually used to borrow stocks and then sell them short, according to a note from Morgan Stanley on Tuesday.

It’s usually a bullish sign to see an increase in hedge fund buying like this. But “this does not feel the case with the latest increase,” said Morgan Stanley, who explained that “it can be attributed entirely to hedge funds covering short positions”.

Shorts in individual stocks increased, even though hedge funds were generally buyers of North American equities, Morgan Stanley said. (Reporting by Nell Mackenzie; Editing by Amanda Cooper and Jan Harvey)

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