Hedge Funds Embark on a Short-Selling Spree in This Bear Market

In this season of economic malaise, hedge funds have held up pretty well. The HFRI institutional index is up 0.1% this year through May. That’s a stellar result compared with the S&P 500, whose plunge has been so steep that it’s now mired in the bear pit.

Part of hedge funds’ relative outperformance appears to be from shorting. The amount that hedge funds committed to short sales recently reached the same level as in 2008, when the financial crisis decimated the stock market, according to a Goldman Sachs study, as reported by Bloomberg. The exact dollar amount wasn’t disclosed, but Goldman said hedge fund short sales surged last week for single stocks and exchange-traded funds.

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“Managers increased micro and macro hedges amid the sharp market drawdown,” Goldman analysts including Vincent Lin wrote in a note. “With the sole exception of staples, all sectors saw increased shorting.”

In a way, this all makes sense, as hedge funds are supposed to offer clients downside protection. They are doing just that amid the current market debacle. During the late lamented bull market, the stunning performance of the S&P 500 and other stock indexes handily outpaced those of hedge funds. That led to widespread investor exoduses from the funds.

Things are different these days. In the first quarter, capital inflows into hedge funds reached their highest sum of new money ($19.8 billion) in seven years, by the count of the HFR Global Hedge Fund Industry Report.

Further evidence of hedge funds’ influence in the stock market: When the S&P 500 jumped 2.4% on Tuesday, a Goldman list of most-shorted stocks climbed almost double that, Bloomberg reported. This was a short-covering rally, says market savant David Rosenberg, president of Rosenberg Research.

“When you get rallies like this,” he says, “it’s short covering.”

Hedge funds “are in a position to take advantage when every asset class is going down,” says economist David Levy, chairman of the Jerome Levy Forecasting Center.

Tags: Bear Market, David Levy, David Rosenberg, Goldman Sachs, Hedge Funds, HFRI institutional index, short sales

The aggregate funded ratio for 255 defined benefit pension plans sponsored by S&P 500 Index companies surged in 2021 to 96.2% from 87.8%, its highest level since just before the Great Financial Crisis, according to research from Wilshire.

That figure has since risen to 97.4% as of the end of May, which Wilshire’s 2022 Report on Corporate Pensions attributed to a drop in liability values during the first half of 2022. Wilshire said there has been a decrease in liability values since the beginning of the year due to a nearly 150 basis point increase in yields used to discount pension liability values. It is the first time the discount rate has increased in three years. However, the report also noted that at the same time assets have decreased due to factors such as higher inflation, interest rate hikes and the Russia-Ukraine war.

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Wilshire estimates that aggregate assets increased to a record high of $1.633 trillion at the end of 2021, a 2.26% increase from $1.597 trillion a year earlier. Meanwhile, aggregate liabilities for the plans decreased 6.6%, or $121 billion, to $1.70 trillion as of the end of fiscal year 2021 from $1.82 trillion a year earlier. As a result of the decrease in liabilities and increase in assets, the aggregate pension deficit shrank by an estimated $157 billion to $65 billion from $222 billion. It was the largest improvement of the plans’ deficit since the “taper tantrum” of 2013.

Investment returns and contributions increased the plans’ asset values by 8.48% and 1.32% respectively during the year, while benefit payments decreased asset values by an estimated 6.13%. The contributions and asset returns increased funded levels by eight percentage points, which more than offset benefit accruals, interest cost and benefit payments, which decreased the funded ratio by approximately four percentage points.

As a result of the improved funded levels, the number of plans that reported pension assets that equal or exceed liabilities nearly doubled during the year to 88 from 46, which represents 34.8% of the plans, compared with 17.8% at the end of fiscal year 2020.

The report also found that although the aggregate asset allocation of the plans changed little over the past year, the total allocation to equity has dropped by more than 10 percentage points over the last decade, while the total allocation to fixed income has increased by more than 13 percentage points.

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