Has the wind changed in the US stock market? Hedge funds are selling and shorting at the fastest pace in two years

Retail investors in the US stock market are still buying heavily in tech stocks like NVIDIA, but the "smart money" on Wall Street has begun to sell off most of their tech-heavy stocks.

On Monday, Goldman Sachs pointed out in a report that after the US stock market hit historic highs, hedge funds have started to shift towards rapidly selling US stocks.

Goldman Sachs analyst Vincent Lin stated that hedge funds have been actively selling and shorting the TMT sector (technology, media, and telecommunications) in the past month, with a focus on semiconductor stocks, including NVIDIA. In June alone, hedge funds' net selling in the US TMT sector is set to reach a record high for Goldman's main brokerage business. (Driven by short selling, fund managers also reduced their net selling in consumer and essential goods stocks).

Hedge funds are closing long positions to reduce risk exposure

Goldman Sachs data shows that hedge funds are reducing their risk exposure through closing long positions and partially covering short positions. The total leverage ratio of US fundamental long and short positions has fallen for the sixth consecutive week to 190.8%, with the net leverage ratio dropping by 2% to 53%, marking the largest decline this year. This indicates that hedge funds are becoming more cautious, gradually deleveraging and reducing risk exposure. Flow data also shows that hedge funds have been net selling US stocks for the third consecutive week, mainly driven by closing long positions.

Specifically, out of the 11 major sectors in the US stock market, 8 sectors saw net selling, including IT, essential consumer goods, real estate, and finance sectors. The consumer goods sector was heavily shorted, seeing net selling for the third consecutive week, with last week marking the largest net selling since November 2023. Meanwhile, the industrial, materials, and energy sectors saw net buying.

Goldman Sachs pointed out that one of the key factors leading to the shorting of the US stock consumer sector last week was that several large consumer companies such as Levi's and Nike reported weaker-than-expected earnings, along with weak core PCE price index, which negatively impacted market sentiment.

Are retail investors becoming the hedge funds' bagholders?

In contrast to the recent rapid selling and shorting of US tech stocks by hedge funds, retail investors still hold hope for US tech stocks.

Vanda Research pointed out last Thursday that as of June 17th, retail traders are putting more funds into semiconductor stocks - mainly NVIDIA and the triple-long semiconductor ETF (SOXL).

While hedge funds are quickly "escaping" tech stocks, retail investors continue to pour in. Vanda Research suggests that hedge funds are likely offloading a significant amount of tech stocks to retail investors. Beneath the calm surface of the market, there may have been a significant turnover of stocks, with hedge funds potentially selling a record number of tech stocks to retail investors**