Global macro hedge funds and institutions fuel stock market demand

Investing.com -- Global macro hedge funds and long-only funds have stepped in to support equities just as retail demand has slowed, Barclays (LON:BARC) strategists revealed in a Tuesday note.

“Institutions take the buyer baton back from retail,” a team led by Venu Krishna wrote.

Small investors recently pulled money from stocks into bonds and cash, but institutions increased equity exposure after second-quarter earnings beat expectations.

“U.S. mutual fund equity exposure is back above the long-term median for the first time in over a year, and global macro hedge fund exposure is at year-to-date (YTD) highs,” strategists said.

The institutional participation is not yet indiscriminate, they note, with net speculative positioning in S&P 500 futures still materially down on the year despite a modest improvement month over month.

Strategists argue that the Federal Reserve and jobs data could act as catalysts for further institutional buying if conditions remain benign.

Options activity is also pointing to rising institutional risk-taking. Barclays highlighted steep S&P put skew and elevated put-to-call open interest as signals of increased hedging demand.

Assets in long VIX exchange-traded products have more than doubled in the past two months to over $2 billion, consistent with a historically steep VIX futures curve.

At the same time, Barclays’ Equity Euphoria indicator has dropped, hinting that retail support has faded from recent highs, though they pointed out that euphoria often dips in August before rebounding in September.

Systematic strategies have also added to equity exposure. Volatility control allocations have climbed to around 66% and could surpass 80% in a supportive market environment.

Risk parity funds have sharply increased equity allocations, while commodity trading advisors (CTAs) remain materially long equities, led by the U.K. at the 95th percentile, and have shifted exposure from Europe to the U.S.

They have also raised positions in U.S. Treasuries while shorting bonds in Europe, the U.K. and Japan.

Meanwhile, retail investors have rotated out of equities, with global stock funds seeing net outflows over the past month.

Barclays said bond funds were the primary beneficiary, with rolling one-month inflows exceeding $165 billion, alongside strong allocations into money markets.