US stock updates
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For the first time since the coronavirus hit the financial markets last year, investors in the United States began to take back their leverage and remove some of the borrowed money that fueled the market rally since last year.
According to Wall Street self-regulatory authority, the Financial Industry Regulatory Authority, investors had $ 844 billion in July.
Separate data from Goldman Sachs, which operates one of the largest prime brokerages in the world, showed that the investment bank’s hedge fund clients had reduced both net and gross leverage in recent weeks. Morgan Stanley has also seen long-short stock hedge funds trading on it reduce their leverage, while bankers from other large New York-based prime brokers said a similar trend was afoot.
Finra does not publicly disclose who is driving the debt each month, and it was unclear if the many retail investors who started day trading during the pandemic also limited their use of margin loans. More comprehensive data from the Federal Reserve on hedge fund leverage is not yet available.
Interactive Brokers, which serves 1.5 million customers, announced this month that its customers’ margin loan balances were down 2 percent from the previous month to $ 47.9 billion in July. Charles Schwab’s margin balances rose the least in July since the retail broker began releasing the number on a monthly basis earlier this year, though they still hit a record $ 79.9 billion.
Mark Aldoroty, who runs Prime Services for Pershing, a division of the Bank of New York Mellon, said fund managers had less confidence in how the market will perform in the coming months.
He pointed to the unexpected move by Chinese regulators to tighten their control over both the technology and education sectors, which misrepresented funds that owned Chinese stocks. The swings in US equities over the past few weeks, as economic data largely lagged behind expectations, also shook investor confidence in the rally.
“You have to start thinking, ‘My belief may be correct, but does it matter?'” Aldoroty added. “Because of the way the market has acted, there is no longer any need for pure fundamental research to influence decisions.”
The losses in Chinese tech stocks have been particularly painful for large hedge funds. The Nasdaq Golden Dragon China Index is down a little more than 46 percent from its all-time high in February.
In an analysis of 813 hedge funds with nearly $ 3 trillion in gross equity positions, Goldman Sachs found that at the start of the third quarter, a third held Chinese stocks, with many placing big bets on Alibaba. The company was among the top 10 holdings in Bridgewater, the world’s largest hedge fund, and was also a significant stake in Tiger Global Management and David Teppers Appaloosa Management in late June, as filed with the Securities and Exchange Commission.
Many large hedge funds reduced their holdings in Chinese securities in the second quarter in response to the decline in prices.
In the US, the economic picture has also become blurred as coronavirus cases have increased and economic indicators such as consumer sentiment and production indices showed a cooling trend.
The borrowing reduction follows a stellar run for US stocks, with the benchmark S&P 500 index up 19.7 percent so far this year. The surge was boosted by economic stimulus from Washington. But the fact that many investors have bought into the market with money borrowed has been a warning sign for regulators, especially given the limitations on data that some swap derivative transactions do not capture.
This was a point that emerged from Archegos Capital Management’s implosion in March. The investment group’s sour bets resulted in more than $ 10 billion in losses for its trading counterparts, including Credit Suisse and Morgan Stanley. And the fact that the investment group used total return swaps instead of buying the stocks outright meant regulators had little insight into the problems that were brewing.
The Federal Reserve warned in May that the tools it and other regulators have to measure hedge fund leverage “may not capture important risks.” Many hedge funds also use options to increase returns.
Banks tightened margin loan conditions with some customers following the Archegos affair, which has forced some hedge funds to post additional collateral, according to bankers from several large traders. However, the bankers said these reviews were largely conducted months ago and are not driving the recent decline in debt.
Trading activity has also slowed in the months since Archegos conquered Wall Street, including many of the stocks propelled by new retailers who used free apps like Robinhood to try their hand at the markets for the first time .
“There was a certain level of aggressiveness in trading earlier this year that made people more willing to place leveraged bets,” said Steve Sosnick, chief strategist at Interactive Brokers. “Now the margins we’re seeing seem to be less about margin speculation than about margin investing.”
He added, “The turnout we saw earlier this year was unprecedented and likely unsustainable.”