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Hedge funds employing long/short strategies are reaping profits in 2024 thanks to a macroeconomic shift that’s punishing heavily shorted stocks, according to a recent UBS report. This reverses a trend from late 2023 where heavily shorted stocks surprisingly outperformed, hurting returns for long/short hedge funds.
The tide has turned. Since the start of 2024, heavily shorted stocks across various sizes and sectors have suffered more compared to their less shorted counterparts. This has led UBS analysts to enthusiastically term the current economic climate as a “hedge fund nirvana.”
The UBS report highlights several examples. Companies like Marathon Oil, Bath & Body Works, Best Buy, Blackstone, Whirlpool, Kroger, and Moderna – all heavily shorted – have underperformed relative to less shorted companies. Conversely, less shorted stocks like Alphabet, Amazon, Kinder Morgan, American Express, Eli Lilly, General Electric, and Salesforce have enjoyed outperformance. This shift directly benefits long/short hedge funds.
This favorable economic environment coincides with more positive growth forecasts, leading to expectations of fewer interest rate cuts. The UBS report acknowledges that hedge funds try to mitigate macro risks, but certain environments are inherently more or less suitable for their strategies. The current trend of heavily shorted stocks underperforming is a particularly advantageous situation for these funds, likely to persist as long as the economy remains strong.
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