Stocks Are Shrugging Off Bank Woes With Help From Hedge Funds

A question has arisen amid all the bank failures. How, with the bond market enduring its worst spasm of volatility in almost four decades, have benchmark-level stocks managed to glide along, oases of calm?

Part of the answer, as is often the case, is positioning.

Since the day before SVB Financial Group’s big share plunge, the S&P 500 is down only 1% despite a crash in regional lenders that has wiped out almost a quarter of the industry’s share value. The Nasdaq 100 has climbed almost 3% over the stretch, extending its year-to-date advance to 15%.

It’s a vivid example of resilience, particularly next to what’s occurred in Treasuries. While hopes for a pause in the Federal Reserve’s tightening campaign are also at play, big money mangers in equities have been on guard for the worst since before the financial fireworks erupted, cutting stock exposure while loading up on protection via cash and options hedging.

Net money flows for US stocks by hedge funds tracked by JPMorgan Chase & Co. have been turning negative since last August, according to the firm’s prime brokerage unit. Including other regions, net leverage among equity long-short funds now sits in the 6th percentile of its range since 2017 — a clear sign of risk aversion.

According to market-wide regulatory filings compiled by Goldman Sachs Group Inc., hedge fund holdings in banks stood 343 basis points below what would be indicated by a benchmark index at the start of 2023.