Hedge Funds Brace for a Fall

The S&P 500 has amazed investors with a 21% rise since its early April dip, yet hedge funds are suddenly bracing themselves. Fresh positioning data shows many multi-strategy and long/short funds trimming exposure to US equities to the lowest levels recorded since 2020.

Managers point to several stress points. One is valuations, which have been pushed sky-high again by enthusiasm after Washington and Beijing agreed to pause their tariff sparring. At the same time, President Trump’s fresh talk of a 25 per cent levy on goods from Canada, Mexico and China create a sort of minefield for potential market gains.

Layered on top of the trade issues are the macro risks. A well-circulated note from Steve Cohen puts the odds of a US recession by mid-2026 at nearly one-in-two, citing softening leading indicators, swelling federal debt, and the possibility that higher import costs could choke consumer demand. The warning has resulted in traders and commentators asking whether a “black-swan” event is on the way.

The CBOE Volatility Index, Wall Street’s preferred fear barometer, has moved higher even as the S&P 500 continues to visit records near 5,840. It seems that sophisticated investors are buying downside protection rather than chasing upside momentum.

Credit markets are sending their own caution signals. Moody’s recent downgrade of the US sovereign outlook, coupled with research-desk warnings from UBS and Goldman Sachs about a late-cycle earnings squeeze, has kept bond traders on edge. If you were wondering why there was a leg down in US equities seemingly out of nowhere the last few days, these combined factors should help get you up to speed with what hedge funds have been seeing.

Retail traders, who helped fuel the boom with record inflows earlier this year, might now be stuck. History suggests that when the so-called smart money goes defensive, turbulence often follows. That does not guarantee an immediate sell-off, but it does raise the bar for any further upside. Earnings will have to look amazing, geopolitics must remain calm, and interest-rate expectations must not become a flashpoint. Meanwhile, as hedge funds reduce their exposure to US equities, many - including Greenlight Capital - are increasing their allocations in gold, reinforcing its role as a safe-haven asset amid ongoing market volatility and economic uncertainty.