Hedge Funds' Bearish Bets Spark Wall Street Sell-Off

NEW YORK (Reuters) - Global hedge funds added more bets against U.S. stocks over the last week through Jan 9, ahead of a blowout U.S. jobs report that sparked a sell-off on Wall Street, Morgan Stanley and Goldman Sachs said in notes on Friday. The U.S. Labor Department's closely watched employment report on Friday showed job growth accelerated to 256,000 jobs in December, the most since March, while the unemployment fell to 4.1%. The hotter-than-expected jobs data sent stocks spiralling, sending the S&P 500 down 1.54% on Friday and erasing all its 2025 gains.

Morgan Stanley said portfolio managers increased shorts - or bets stocks will fall - in sectors such as staples, software, financials and healthcare in the days ahead of the jobs report, while they sold long positions in communication services. Still, the bank said hedge funds bought European and Asian stocks over the same period. Goldman Sachs also said short positions outpaced long additions to portfolios, but it saw this trend in all regions, led by North America and Europe.

"We've seen a rotation where managers have been taking profits, selling their longs, and then adding to shorts," said Jon Caplis, CEO of hedge fund research firm PivotalPath. He said the move is also related to the Federal Reserve's more hawkish take on interest rate cuts and big data releases, such as the consumer price index on Wednesday.

One exception was the technology, media and telecommunications sector (TMT), Goldman Sachs said, as hedge funds added it at the fastest pace in three months. Stocks in the technology sector were among the hardest hit on Friday, down 2.23%, behind financials and real estate. Big tech companies start to report earnings after Martin Luther King Jr. Day on Jan 20.

As two of the biggest global prime brokers, Goldman Sachs and Morgan Stanley track the portfolios of their hedge fund clients to indicate positioning and flow trends.



The recent increase in bearish bets by hedge funds has contributed to the overall market decline, with the S&P 500 index falling 1.54% on Friday, erasing all its 2025 gains. The strong jobs report and the Fed's hawkish stance on interest rate cuts have also played a role in the sell-off. Additionally, the recent volatility in the equity market, driven by elevated hedge fund concentration and the strong performance of popular stocks, has supported returns this year but lifted the crowding index to a record high.

In conclusion, hedge funds' increased bearish bets, particularly their increased short positions in specific sectors and rotation from longs to shorts, have had a significant impact on the overall market performance. Their actions have contributed to the sell-off in certain sectors, market volatility, and the decline in the S&P 500 index. The strong jobs report, the Fed's hawkish stance, and the recent market volatility have all played a role in the recent market decline.