JPMorgan says hedge fund caution in October could set up a year-end rally

Investing.com -- Equity markets could be poised for a year-end rebound after hedge funds turned unexpectedly cautious in October, according to JPMorgan.

In a recent note, JPMorgan analysts led by Nikolaos Panigirtzoglou said that “the performance data of the monthly reporting hedge funds for the month of October revealed a surprising reduction in the equity exposure of Equity Long/Short hedge funds to their lowest level in more than a year.”

"Equity Quant hedge funds, which tend to be closer to neutral, also exhibited a rather low equity beta in October," the bank stated.

However, “by turning surprisingly cautious in October, Equity Long/Short hedge funds have room to propagate the equity market into year-end,” the analyst added. 

JPMorgan’s analysis also examined the evolving influence of retail investors on equity trading. 

While retail participation “doubled in a step change during the pandemic to around 25% in U.S. cash equities and around 50% in zero-day-to-expiry options,” the bank said this surge has since stabilized. 

“There has been no further increase since then but rather mean reversion,” the analyst wrote.

However, retail investors remain an important force in market flows. According to JPMorgan, their influence “stems less from how often they churn their equity or option holdings and more from their share in end-investor flows.”