Hedge funds have been rapidly exiting positions, particularly on European stocks, leading to growing concerns among hedge fund managers regarding their potential returns. According to a report from JPMorgan, this trend intensified last week, with hedges unwinding positions in individual stocks at the highest rate in over two years. Such activity echoes the market behavior seen in March 2020, when portfolio managers reduced their market exposure due to pandemic-related uncertainties. Following a sharp sell-off in U.S. markets attributed to growth concerns, European shares continued their decline.
Questions surrounding the future of Germany’s fiscal reforms have also contributed to investor anxiety. When large volumes of equities are sold, it often results in decreased stock prices and impacts overall market values. A situation arises where large funds sell in bulk, prompting smaller funds to exit their positions to limit losses, which further amplifies the market volatility. Bruno Schneller, managing director at Erlen Capital Management, highlighted the precarious position that smaller hedge fund managers find themselves in during such times.
These smaller funds typically operate with limited capital and often rely on concentrated positions for returns. When larger funds sell heavily, it can lead to a significant drop in trading activity, particularly for less liquid stocks. Schneller likened smaller managers to dinghies caught in the wake of a supertanker, stating that large funds’ maneuvering can create turbulence that jeopardizes the smaller funds’ stability. The JPMorgan note also pointed out that stock pickers and multi-strategy hedge funds have had to liquidate positions.
Additionally, European hedge fund managers holding short positions were negatively affected as bigger funds began to buy back their shorted assets, which can inadvertently drive up stock prices. Concerns remain about the risk of overcrowded trading positions, with stock pickers tracked by JPMorgan reporting an approximate 2.5% decline in February and a 1.6% fall so far in 2025. Multistrategy funds recorded similar declines, showing signs of distress in a fragmented post-Brexit European market where trading volumes are thinner and long-term investor participation is waning. Schneller cautioned that a deleveraging shock could create waves across different markets, potentially hitting smaller exchanges the hardest, while also suggesting that banks may tighten their lending further amid general monetary constraints.