Barclays reports shift in fund strategies amid market volatility

Barclays (LON:BARC) provided insights into current investment strategies, noting that long-only funds have been reducing their equity holdings, a trend that persisted through a period referred to as "Liberation Day." Meanwhile, global macro hedge funds have been purchasing selectively, taking advantage of the lowest valuations seen in over a year.

Despite the unwind of some speculative positions in Treasury futures, this has not been substantial enough to cause the recent sharp declines in bond markets, considering that bond positioning remains high overall.

Retail investors, on the other hand, are demonstrating resilience in the equity markets. The American Association of Individual Investors (AAII) sentiment continues to be very bearish; however, retail buyers have returned in significant numbers over the past week.

This return has resulted in net inflows for U.S. equities, countering the effects of increased volatility and the already high levels of stock ownership among households. In contrast, retail capital is leaving U.S. credit markets at the fastest rate since 2022, and there have been net outflows from long-term bond funds. Investors are shifting towards front-end Treasuries, reducing their exposure to corporate debt and long-duration assets.

Systematic funds have seen their allocations plummet to levels comparable to those during the COVID-19 pandemic and the Global Financial Crisis (GFC), amid a backdrop of heightened uncertainty. Volatility control funds have likely reduced their market exposure to approximately 20% from pre-Liberation Day highs of 58%, and are not expected to significantly influence buying or selling in the immediate future.

Similarly, risk parity funds are in need of considerable deleveraging due to the "everything sell-off," which has been characterized by high volatility and asset correlation.

Commodity Trading Advisors (CTAs) have experienced significant losses, some of the worst in two decades, as a result of rapid policy shifts and extreme market reversals. A sudden change in the positive trend across assets that occurred before Liberation Day led to losses across their positions in equities, bonds, the U.S. dollar, and oil. While most equity selling by CTAs in the U.S. is believed to have already taken place, they maintain a neutral stance on European and Chinese equities, with potential further outflows expected to affect European stocks.

CTAs have also reduced their long positions in the U.S. dollar, sold oil, and decreased their Treasury holdings, particularly in longer maturities (10-year/30-year), while still holding long positions in the short end (2-year/5-year) of the curve.

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