JPMorgan says battered hedge funds may be buying less tech after a July rout
Retail investors may be more of an influence on stock markets and that may mean more volatility ahead, say JPMorgan strategists.
Tech stocks are set for a wobble on Thursday, as shares of memory makers Sandisk and Western Digital tumble following earnings that failed to impress investors.
Some on Wall Street have been hoping that a brutal July for tech, driven by chip/memory stocks, would clear the path for a better month ahead. For August so far, the Nasdaq COMP is up close to 2%.
However, our call of the day from strategists at JPMorgan led by Nikolaos Panigirtzoglou, warns of a continued bumpy ride ahead for the sector that may now be counting on less support from one influential group of bruised investors.
Preliminary data from hedge-fund analytics group Pivotal Path suggests an "unprecedented" 10% loss in July for technology, media and telecommunications (TMT) equity-sector hedge funds, JPMorgan strategists said. Multi-strategy funds suffered a 2.3% drop, their fourth-biggest in history, the data showed.
TMT Equity Sector hedge funds head for bruising July, says JPMorgan.
Panigirtzoglou and his team said the TMT hedge-fund losses exclude Situational Awareness, the high-profile AI and tech-focused hedge fund that reportedly sold most of its holdings to Citadel.
"This makes the 10% loss look even more striking and suggests that like Situational Awareness, several other TMT Equity Sector hedge funds suffered from forced liquidations of memory stock exposures," they said.
And thanks to a brutal July, "the capacity of TMT Equity Sector and Multi Strat hedge funds to hold tech exposures would be structurally more limited going forward," they said.
Here's the upshot for markets: "If this assessment proves correct and the capacity of hedge funds to hold tech exposures is structurally reduced, the tech trade would become over the longer-term even more dependent on retail investors and thus more susceptible to the swings emanating from leveraged ETFs, retail option buying and retail margin accounts."
As the strategists explained, the severity of July losses for those hedge funds "raises questions" about their risk-management framework that allowed concentrated chip/memory stock positions to be build up.
"Going forward, the [assets under management] decline of these two hedge fund categories for July means that their risk budgets are mechanically shrunk," they said. Those funds may adapt a more cautious and rigorous stance when it comes to tech, cutting out heavy concentrations. The prime brokerages that provide the financing to hedge funds may not allow them to invest as much in tech, they said.
The markets
U.S. stock futures (ES00) (YM00) are higher, apart from Nasdaq-100 futures (NQ00). The yield on the 10-year Treasury note BX:TMUBMUSD10Y is rising.
Key asset performance Last 5d 1m YTD 1y S&P 500 7723.55 5.57% 3.22% 12.83% 21.73% Nasdaq Composite 26,363.44 7.86% 1.90% 13.43% 24.54% 10-year Treasury 4.631 -4.60 7.30 45.90 37.20 Gold 4337.2 4.19% 4.95% 0.12% 24.54% Oil 75.35 -10.25% 4.93% 31.25% 18.07% Data: MarketWatch. Treasury yields change expressed in basis points
The buzz
Sandisk stock $(SNDK)$ is down 9% after the memory-chip maker's guidance missed high Wall Street expectations. Western Digital stock $(WDC)$ is also falling despite an earnings beat.
AppLovin shares $(APP)$ are slumping 14% after disappointing earnings from the ad-tech platform.
Up to 911.5 million shares held by SpaceX $(SPCX)$ insiders will be up for sale on Thursday.
Less than six months after announcing 40% of its staff would be laid off for AI, Block (XYZ) said that strategy is yielding results.
DraftKings $(DKNG)$, Airbnb $(ABNB)$ and Rigetti Computing (RGTI) will report after the close.
Weekly jobless claims are due at 8:30 a.m., along with second-quarter productivity. Wholesale inventories are due at 10 a.m.
OpenAI's models shared hacking tips on a secret messaging board before Hugging Face breach
The chart
"Today's large language models may be reminiscent of the ATMs of the 1980s-powerful tools that automate certain tasks but augment many more, making workers more productive and leaving the broader structure of work largely intact," says Adam Schickling, Vanguard senior economist, sharing his chart. The proliferation of ATMs in that period allowed for more bank branches to open, keeping tellers in jobs, but mobile banking that came decades later meant more job losses for those workers, though it also generated new positions, he said. To date, mass AI-fueled layoffs among white-collar workers has yet to happen, which leads Schickling to believe "we remain closer to the ATM phase than the mobile banking phase."
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