Hedge Funds Focused on European Stock Markets Affected by October Decline
According to recent developments, hedge funds focusing on European stock markets experienced significant losses in October, marking their worst monthly performance since September 2023. According to a report from Goldman Sachs, these funds recorded a decline of 2.6% last month. This drop coincided with a broader market sell-off as detailed in a client note shared by Goldman Sachs on Friday and observed on Monday.
A comprehensive index tracking European stocks decreased by 3.6% in October during the third-quarter earnings season. While banks, pharmaceutical companies, and biotechnology firms reported positive earnings, weaker performances in the industrial and energy sectors negatively impacted these profits.
Global market participants shifted their investments towards U.S. stocks in anticipation of the presidential elections, leading to a widespread sell-off in European equities. This strategic reallocation of assets significantly affected the performance of hedge funds in Europe, reducing their year-to-date returns to 5%. This figure remains well below the 11.5% returns of U.S. stock pickers.
The primary culprit for the losses was the Utilities sector, which includes gas, electricity, and water companies. However, industrial stocks and certain short positions where investors bet on declining stock prices remained profitable for specific hedge funds.
The technology hardware sector, particularly semiconductor and related equipment companies along with aerospace and defense sectors, experienced the highest levels of net selling. On the other hand, financial stocks such as banks continued to attract net buying from hedge funds for the second consecutive month. These funds are closing their short positions and opening long positions, anticipating an increase in stock value.
Additionally, European-focused fundamental stock pickers significantly reduced their gross leverage in October, bringing net leverage to its lowest level of the year. This indicates a more cautious approach in the face of market volatility.