Asset managers brace for pain as most crowded trades turn sour

Two of the world’s most crowded trades are headed south at precisely the same time, resulting in a double-dose of pain for global fund managers.

Shares of the FAANG-BAT complex — which includes U.S. tech giants Facebook, Amazon, Apple, Netflix, and Google parent Alphabet, as well as China’s Baidu, Alibaba and Tencent — have lost more than $200 billion in market value since late last week. Money managers in a Bank of America survey earlier this month labeled being long the companies the most crowded bet in markets. Meanwhile, the dollar resumed its best run since 2016 Wednesday. That’s after hedge funds and other large speculators amassed the biggest net-short position in more than five years, Commodity Futures Trading Commission data show.

Corporate debt allocations among money managers is at an all-time high of 37%, matching levels last seen in August 2016.
Traders work on the floor of the New York Stock Exchange (NYSE) in New York, U.S., on Friday, May 27, 2016. U.S. stocks edged higher, with the S&P 500 on course for its biggest weekly advance since March, while investors awaited remarks from Federal Reserve Chair Janet Yellen for hints on the timing of the next interest-rate increase. Photographer: Michael Nagle/Bloomberg

“The problem is that some of these big hedge funds and macro funds, they keep jumping onto the same stuff over and over again,” said Michael Purves, chief global strategist at Weeden. “The boat gets very lopsided very quickly.”

Discontent has been building in the mega-cap tech sector as Facebook comes under growing scrutiny after a controversy surrounding users’ personal data, leading the likes of DoubleLine’s Jeffrey Gundlach to recommend shorting the stock. Google parent Alphabet added to the angst Tuesday as first-quarter results sparked concern that the internet company is embarking on a spending binge, sending shares plunging.

The Bloomberg Dollar Spot Index climbed 0.5% Wednesday, adding to an advance that’s now exceeded 2% since April 17.

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Are the recent declines in tech just some high-flying stocks coming back to earth, or a turning point for the sector?

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Thirty-three percent of respondents in the Bank of America survey — representing asset managers including institutional funds, hedge fund and mutual funds — said being long FAANG and BAT shares was the most crowded trade in markets this month, compared with 21% who said it was being short the dollar, the no. 2 response. A total of 216 respondents with $646 billion of assets under management participated in the survey, which was conducted from April 6 to April 12.

“Confusion is very high. People are trying to understand what is the regime shift we’re dealing with,” Purves said. “That’s one of the reasons you’re seeing this back and forth price action.”

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