The Blubber

Algorithmic hedge funds, which employ computer-based trading strategies to navigate equity markets, are poised to initiate substantial sell-offs totaling between $20 billion to $30 billion over the next two weeks, according to a note from UBS. These hedge funds, previously bullish on stocks, have transitioned to a neutral stance due to recent market dynamics.

UBS anticipates that the imminent outflows from these hedge funds will have a noteworthy impact on equity markets, potentially amplifying the ongoing downward trajectory in stock prices. This shift in sentiment represents the first time these algorithmic hedge funds will be net short on equity markets since November 2022.

The U.S. stock market experienced a 3.6% decline in the July-September period, marking its first quarterly downturn in 2023. This decline was influenced by concerns surrounding the potential extension of elevated interest rates and rising oil prices, which contributed to inflation worries.

Commodity trend advisers (CTAs), the hedge funds in question, differ from traditional stock-picking hedge funds in that they focus on monitoring equity movements rather than forming judgments on whether stock prices are overvalued or undervalued. As a result, their trades often lag behind market movements, as it takes time to establish a downward trend.

The U.S. stock market's estimated size is $46.2 trillion, according to the Securities Industry and Financial Markets Association. Additionally, UBS notes that CTAs have been maintaining long positions in the dollar while shorting long-term U.S. Treasuries. These hedge funds have consistently purchased the dollar through September, with UBS estimating their total buying volume at $60 to $70 billion.

The foreign exchange market, in which currency trading occurs, reached a record $7.5 trillion in daily trading volume, according to the Bank for International Settlements in September 2022, with 88% of this volume involving dollar pairings.