Barclays Alert: Risk of Equity Unwind Rises Amid Concentrated Positioning and Systematic Strategies

Barclays warns of increased risk due to concentrated equity positioning in the US market. Tech-heavy gains, rising Big Tech stock valuations, and growing retail money are identified as factors. The caution comes as global macro hedge funds decrease long equity exposure, and systematic positioning remains vulnerable to outflows. With equity allocations surpassing control levels and CTAs holding high allocations to major indices, the bank suggests potential for significant unwinds in the market.

The US equity market, fueled by tech-heavy gains, rising Big Tech stock valuations, and growing retail money, has experienced significant growth throughout 2023. However, recent developments have raised concerns about potential risks. According to a report from Barclays, the concentration of equity positioning in the US market has reached elevated levels, increasing the risk of a significant unwind [1].

Global macro hedge funds, which have been bullish on equities for most of the year, are now turning bearish, leaving behind long equity positions. This shift in sentiment comes as the 10-year Treasury yields have spiked to around 5%, causing the S&P 500 to decline by roughly 9% since its peak at the end of July [2]. Commodity trend advisors (CTAs), which were already bearish on equities, have further increased their short positions, shorting US technology stocks in particular [2].

Barclays' U.S. equity strategy team notes that CTAs are bearish on most assets, including US Treasuries, JGBs, and Bunds, but they are long oil. This trend highlights the potential for a broad-based correction in the market, rather than a targeted one.

Despite these concerns, the hedge fund industry remains resilient, with retained profits helping to buffer against investor redemptions [3]. However, as the risk of a correction grows, investors should remain vigilant and closely monitor market developments.

[1] https://sg.finance.yahoo.com/news/barclays-risks-tech-correction-mounting-055541704.html
[2] https://www.reuters.com/markets/macro-hedge-funds-turn-bearish-equities-barclays-2023-10-31/
[3] https://www.barclayhedge.com/insider