Volatility is back—Here's what hedge funds are doing during the market's wild swings

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Amid the elevated volatility, hedge funds increased their short activity, while focusing on quality stocks, according to Goldman Sachs' prime brokerage data.

The Wall Street firm noticed a pickup in shorting macro-related securities this week. Specifically, hedge funds have been shorting exchange-traded funds in large cap equity, sectors and credit categories for three sessions in a row this week, Goldman said. Macro products are more sensitive to political or economic events, and the increased shorting activity could mean that hedge funds are bracing for more tightening from the Federal Reserve as these securities typically are hurt by rising rates.

The strategist expects the higher-for-longer interest rate regime poses a direct threat to company profitability. The firm screened the S & P 500 for stocks with low leverage, high interest coverage and low EBITDA growth variability. Costco , Cisco and Cadence Design Systems were some of the stocks recommended. Underweight cyclicals Hedge funds have been moving away from cyclical stocks — those that ebb and flow with the strength and weakness of the broader U.S. economy.

 

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