Positions Severely Underweight, Unable to Keep Up with US Stock Market Rebound, Hedge Funds Engage in "Panic Buying"

The strong rebound of US stocks to historic highs has put many hedge funds in an awkward situation—their positions seriously lag behind the market, forcing them to chase gains in panic.

The S&P 500 recently broke through 7000 points, reaching a historic high, with core sectors such as AI, semiconductors, and tech hardware generally rebounding and surpassing pre-conflict levels. However, according to Conor Lyons, a UBS trader, in his latest report, while hedge fund performance data shows participation in this round of repricing, overall position data indicates that net exposure has not kept pace.

This mismatch is forcing hedge funds to almost blindly chase gains and has directly driven abnormal activity in the options market recently—yesterday (April 15), the largest single-day call option volume since 2026 was recorded.

The head of Goldman Sachs Delta-One business holds a similar view: current capital flows are one-sided, and CTAs, clients, and various participants generally have insufficient positions, competing to chase the trend. This structure has formed an effective upward short Gamma pattern, further strengthening the market’s continued upward momentum.

Hedge funds lag behind in position; long-short ratio drops to low levels

UBS data shows that last week, hedge funds recorded the largest single-week net selling since 2026, driven by both the active reduction of longs and the addition of new shorts. The reduction of longs was concentrated in US tech hardware, while new shorts mainly targeted US software.

More notably, the current long-short ratio for hedge funds is still below the peak level during the “Tariff Day” panic sell-off, when the stock market was nowhere near its current heights. This means that with the S&P 500 having recovered to historic highs, the overall net exposure of hedge funds remains relatively low, with only a slight overweight in overall positions.

Retail investors are also failing to keep up with this rebound. UBS data shows that retail outflows last week also hit a year-to-date high, with supply highly concentrated in the semiconductor sector. Retail investors are currently reducing positions when the market rises rather than buying on dips—even though the market hardly offers clear buy-the-dip opportunities anymore.

CTAs turn bullish, but still have room to add

Among systematic strategies, Commodity Trading Advisors (CTAs) have been the main buying force in this rebound. According to the UBS report, CTAs have shifted from net short to net long since last week, but current exposure is only at the 31st percentile historically, meaning that if the market continues to rise, CTAs still have substantial room to add positions.

Risk control strategies are not yet effective buyers, constrained by recently high realized volatility, and their positions remain essentially unchanged week-on-week. However, UBS estimates that if S&P 500 volatility becomes stable and average daily swings narrow to within +/- 50 basis points, risk control strategies could buy about $185 billion over the next month.

The head of Goldman Sachs Delta-One business points out that current position structure actually creates a short Gamma effect in the upward direction, continually strengthening the market’s upward inertia. He also mentioned that, at the index level, the S&P 500 Gamma is relatively long-biased, which helps suppress volatility as the market continues to rise. However, he also stated that he does not agree with the current chase-the-trend logic but fully respects the possibility of continued technical momentum.

Structural changes in the options market are worth watching. Option analysis agency SpotGamma points out that with the VIX options expiring today (April 15), the accumulated positive Gamma protection in the market has largely faded, expanding exposure to bidirectional volatility.

SpotGamma places the S&P 500’s key pivot near 6900 points, with resistance at 7000 and 7020 above and support at around 6800 below. The disappearance of positive Gamma means that the option hedging mechanism that previously helped suppress volatility and smooth upward moves has noticeably weakened, and the market’s volatility space has opened up in both directions.

Earnings season becomes a crucial near-term test

UBS summarizes in the report that the current positioning structure suggests that, absent major geopolitical shocks, the path of least resistance for the stock market remains upward. However, corporate earnings season will become a vital short-term hurdle.

The options market currently prices the average single earnings report swing for the S&P 500 this quarter at 5.3%, slightly higher than the historical average for this period. Implied volatility premiums are most pronounced for the technology, industrial, and materials sectors, showing market uncertainty is highest toward the earnings results for these sectors.

For investors, the central contradiction of the current market is: institutions with insufficient positions are forced to chase, driving the market ever higher; but as Gamma protection weakens and earnings season approaches, the market’s ability to buffer against negative shocks is decreasing simultaneously.