JP Morgan: Crowded trading stampede! Hedge funds suffer their most brutal retracement since "Liberation Day"

Morgan Stanley strategist said that due to the liquidation wave of crowded trades impacting the "fast money" investment group, hedge funds are experiencing their largest drawdown since the so-called "Liberation Day" in early April last year. The bank's strategist said in a report on Wednesday that since the outbreak of the Middle East war, quantitative funds such as Commodity Trading Advisors (CTAs) have suffered their worst performance in nearly a year. The bank stated that long-short equity hedge funds have also experienced significant losses due to their overexposure to European and South Korean markets, while underweighting software stocks. CTAs typically use the collective wisdom of the investment community to exploit momentum in various futures markets. Morgan Stanley cited data from HFR, stating that systematic multi-CTA funds had incurred losses of close to 4% in March. Another index compiled by French Industrial Bank showed a decline of over 2% so far this month. Trend-following funds come in various forms and sizes, with varying investment cycles. Over the past two weeks, the Middle East conflict has escalated, causing trillions of dollars in global stock market value to evaporate, while also pushing oil prices above $100 per barrel for the first time since 2022. Reports indicate that some of the world's largest hedge funds, including Balyasny Asset Management, Citadel, and Millennium Management, experienced declines last week. In other indicators, the HFRX Equity Hedge Index, used by Morgan Stanley analysts to track losses of long-short funds, is expected to fall by 3% this month. Meanwhile, according to data compiled by Goldman Sachs' prime brokerage division, as of the week ending March 6, hedge funds increased their short positions in stock ETFs by 8.3%. Morgan Stanley stated that stocks currently appear more vulnerable than bonds from various asset perspectives. Strategist Nikolaos Panigirtzoglou wrote, "From a positioning perspective, stocks seem more susceptible to shocks than bonds. Previous short USD positions - primarily focused on emerging market currencies - appear to have been covered."