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The stock market slide has gone from bad to worse over the past few weeks. Major indexes such as the Russell 2000 and the NASDAQ composite are now in a bear market, down more than 20%. Meanwhile, the S&P 500 and Dow Jones Industrial Average have fallen 16 and 17% respectively. Surprisingly, hedge funds and institutions may not have seen this sudden downturn coming.

During the third quarter, which ended on September 30, hedge funds and institutions were adding to the ETFs that are designed to replicate and act as proxies for the major indexes. The SPDR S&P 500 ETF Trust (SPY), the Invesco QQQ Trust (QQQ) – a proxy for the NASDAQ 100, and the iShares Russell 2000 ETF (IWM)  all witnessed hedge funds and institutions piling into the ETF. Perhaps a reason for the steep declines as these same investors rush for the exits.

Adding Shares

During the third quarter hedge funds increased their exposure by 12% in the S&P 500 ETF, bringing the total number of 13F shares held by funds to 50.3 million shares. Meanwhile, hedge funds were also piling into the small-cap Russell 2000 ETF, with the total number of 13F shares rising 14% to 14.47 million shares. The NASDAQ 100 ETF saw its holdings among hedge funds rise 12%.

Overall institutions were adding to their holdings in each of the ETF’s too. During the quarter the ETF that saw the highest inflow was the NASDAQ 100 ETF, with its total number of shares held rising almost 7% to 159.9 million total shares. The S&P 500 ETF saw the smallest increase rising just 50 basis points, while the Russell 2000 ETF rose 3%.

Caught By Surprise

Overall it would suggest that most investors have been caught completely off guard by the recent stock market sell-off that seems to get worse with each passing day. It would also suggest the herd-like mentality of the steep sell-off may be to blame for this the recent rise of volatility.

Reversal

One is likely to see that trend among funds and institutions change in the fourth-quarter filling especially if investors follow the trends seen during the first quarter sell-off. During that period institutions dumped 10% of their holdings he S&P 500 ETF, while holdings in the Russell 2000 ETF dropped 8%.

As investors turn to more passive investment vehicles that allow them to move in and out of their holdings quickly, volatility is likely to continue to rise in the future. Especially, when events such as the recent sell-off happen unexpectedly.

This entry was posted on Wednesday, December 26th, 2018 at 8:16 am and is filed under 13F, Hedge Fund News. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.

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