JPMorgan believes equity markets could receive a short-term lift as macro hedge funds move to rebuild stock exposure following the sharp market retreat seen in March, with large U.S. technology companies likely to benefit the most.
In a note to clients, analyst Nikolaos Panigirtzoglou said macro hedge funds sharply reduced their equity beta during March, leaving them underexposed to equities as markets rebounded in April.
Because of this positioning gap, the bank said these funds may need to increase their exposure again. “Macro hedge funds are likely to be induced to rebuild their equity exposures over the coming weeks, propelling the equity market, especially if the current ceasefire leads to a more lasting agreement between Iran and the U.S.,” Panigirtzoglou wrote.
JPMorgan also pointed to elevated short interest in the QQQ ETF as a potential driver of further gains in technology stocks.
“The more elevated short interest for the QQQ ETF implies more room for short covering and thus greater upside for large U.S. tech stocks,” the bank said. It added that technology and communications shares experienced heavy outflows during March and early April, while inflows were concentrated in energy, industrials, and utilities.
The bank also highlighted deteriorating market liquidity across major global equity markets. Liquidity in U.S., European, and Japanese stocks has fallen to levels last observed around Liberation Day, while liquidity in Brent and WTI oil futures has dropped to lows not seen since 2022.
Liquidity in gold futures has remained strained since a selloff in late January, reaching its weakest level since the pandemic.
Across the hedge fund industry, losses of roughly 2.5% were recorded in March, wiping out much of the gains achieved in January and February. Event Driven and Equity Long/Short strategies both finished the first quarter in negative territory.