Barclays analysts said in a research note that hedge funds became buyers of the decline during the first quarter, while systematic funds restored long positions in shares after the April sell-off, leaving room for further gains.
Elsewhere, the bank said long-term equity investing is no longer historically common, retail investor sentiment is rising, mutual funds remain heavily overvalued in big tech stocks, while hedge funds are biased toward cyclicality.
“The April sell-off reset extended long-only equity exposure from a post-COVID record level to slightly below the long-term median,” the bank said. “The catalyst was macroeconomic turmoil associated with slowing growth and persistent inflation, as well as a healthy dose of technical and systematic risk mitigation, potentially leading to stronger equity fundamentals following a strong 1Q24 earnings season.”
Accordingly, Barclays noted that hedge funds have shown greater resilience with no signs of capitulation in response to last month’s stagflation scare.
“In fact, we believe that better-than-expected earnings appear to have motivated hedge fund buying, particularly in the equity futures market,” the bank added.