Hedge Funds are at Risk

According to Morgan Stanley's prime brokerage unit the net leverage showed an increase of about 5 percentage points which is one of the fastest expansions in years. Hedge funds' returns are amplified by the money borrowed by it however it went on a major risk this month. At a time when there was no sign of coronavirus subsiding, the traders went way too confident. Bullish investors are tensed due to stocks which are constantly showing drop which is the biggest drop after 2015. Earlier small investors were rushing into big companies like Tesla Inc. and loading up call options. In a Bank of America Corporation survey, the money managers boosted equity holdings while slashing cash levels to lowest in the previous seven years. In an interview, Tom Plumb, president of Plumb Funds said that any perception of liquidity that the market tends to give us disappears pretty quickly and even these so called very smart investors couldn't escape the current waves of sentiment.

Technology, whose global sales and supply chain are at risk by the spread of the coronavirus were in the list of high demand, even the highest Morgan Stanley's hedge fund clients spread purchases across sectors. Even after the sudden chaos spurred by the coronavirus concern, there are signs that hedge funds will withstand this pain. Along with gains from bets against stocks in a down market and limiting the career risk for managers which is a top concern in an industry whose performance is under growing scrutiny. J.C. O'Hara, chief market technician at MKM Partners LLC, gave signs that everything is not well yet. Moreover, when everyone is thinking about same kind of stocks, the danger of a reversal may grow. In a note to his clients, Morgan Stanley wrote that it will remain unknown if it turns into a large reversal however rotation might not be imminent, but positioning is arguably back to some of the most stretched we’ve seen yet.

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