Hedge Funds Boost Value-Stock Exposure to the Highest in Four Years

(Bloomberg) -- Hedge funds are loading up on value shares and dumping expensive names, helping fuel the sharpest stock rotation since March as the Federal Reserve signals its intent to accelerate monetary tightening. 

Long-short equity funds have raised their value exposure relative to growth to the highest in at least four years, data from JPMorgan Chase & Co.'s prime brokerage show. Among quantitative funds, bets on cheaper stocks have surged to the highest in months. 

While hedge funds remain short on the factor overall, the fast-money shift mirrors moves in the broader market as the Fed resolves to tame price growth with higher rates. Inflation-adjusted bond yields are now spiking, driving investors toward cheap stocks that tend to offer more near-term cash flows. 

A strategy that buys value shares and dumps pricey ones has gained 7% over the last five sessions, its sharpest rally in 10 months. 

“Overall, it seems we're starting off 2022 with more of a cyclical/value bias than we've seen in a while,” a JPMorgan team led by John Schlegel wrote in a Thursday note. “The ‘oversold'/low positioning in growth historically would suggest we could be due for a bounce, but the expectations for the Fed, yields, and the economy over the course of this year make this less clear.” 

Value stocks are typically more cyclical and gain with bond yields, while the opposite is true of growth industries -- exemplified by tech giants like Tesla Inc. Their long-term prospects are less alluring when rates and inflation rise. 

Unlike this time last year, hedge funds are now actively dumping growth shares in both the U.S. and Europe, with little appetite to buy the dips on volatile and expensive shares, the analysts note. Long-short equity funds' net stock exposure overall just dipped below 60%. In the past year it has only been lower than that 2% of the time. 

Among sectors, hedge funds have raised bets on banks and materials. One of their sharpest positioning cuts was in software shares.

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