Stocks and bonds are out and oil is in. It’s the playbook for hedge funds looking to juggle persistent inflation, rising interest rates, and a steeply declining tech-heavy stock market.
Hedge funds are the most bullish on oil since mid-November based on combined net long positions in Brent Crude and West Texas Intermediate futures. Positions rose over the past four weeks as 10-year Treasury yields jumped 50 basis points and the Nasdaq 100 index fell 5.5%. a big driver of the tech selloff that spilled over to the SandP 500 index. Oil, meanwhile, is heading in the opposite direction, with WTI and Brent hitting their highest levels since 2014 on Monday morning.
Historically, Fed tightening cycles have triggered rallies in cyclical stocks. The problem is that non-tech to do so requires strong gains in value sectors, and this is usually accompanied by breadth, meaning small-cap stocks would also rise. the Russell 2000, which is down 3.7% year-to-date. That could be why hedge funds seem reluctant to bet on a reversal of the 15-year downtrend in value. Instead, they are turning back to commodities for returns. .
Oil prices have been supported by rising demand as the global pandemic gradually abates and rising geopolitical tensions. Drone strikes by Houthi rebels in Yemen on the United Arab Emirates have created risk in a region critical to oil exports. In addition, prices receive support. amid concerns that Russia could potentially only meet half of its projected output over the next six months, despite calls to ramp up production more quickly. Bring in the expectation that energy prices will be a continued driver of persistent inflation, and there’s little mystery as to why hedge funds are retreating from plummeting stocks and bonds and instead turning to commodities in search of valuable returns.