• Hedge funds bought global equities for a second straight week, reversing a sharp risk reduction in late July, according to Goldman Sachs.
  • Gross trading activity rose at the fastest pace in seven weeks, with long buying outpacing short sales 1.4-to-1.
  • Single stocks saw net buying for the first time in a month, while materials led sector demand amid the strongest short-covering wave in nearly two years.

Risk Appetite Returns

Global hedge funds have been buying equities for a second consecutive week, according to people familiar with the matter, marking a clear reversal from the de-risking that gripped markets in late July. The shift comes as risk appetite improves across global markets, with the buying spree led by materials and a significant short-covering wave.

Goldman Sachs' prime brokerage data, cited by those same sources, shows that gross trading activity jumped to its highest level in seven weeks. The long-to-short ratio stood at 1.4-to-1, indicating that managers are favoring bullish bets over bearish ones. Single stocks, in particular, saw net buying for the first time in a month, a sign that stock-pickers are re-engaging after a period of caution.

The materials sector led the demand, according to the data, with the strongest short-covering in nearly two years. This suggests that some of the most crowded bearish trades are being unwound, adding fuel to the rally.

A Reversal of Late-July De-Risking

The current buying streak marks a stark contrast to the mood just a few weeks ago. In late July, hedge funds slashed their equity exposure at one of the fastest paces of the year, as concerns over economic growth and geopolitical tensions weighed on sentiment. But that caution has faded, and managers are now re-entering the market with conviction.

"The reversal is notable," said a senior portfolio manager at a multi-strategy fund, who asked not to be named because they are not authorized to speak publicly. "The speed and breadth of the buying suggests that many funds see the recent pullback as a buying opportunity."

This renewed optimism is not isolated to a particular region, with buying spread across global markets. While the specific regions were not detailed, the overall trend underscores a broader improvement in investor confidence.

Implications for the Market

The hedge fund buying spree could provide additional support for equities in the near term. The combination of long buying and short covering often amplifies upward moves, as bearish bets are forced to unwind. However, some analysts caution that the rapid shift could also signal that the market is becoming crowded again, potentially setting the stage for another sharp pullback if sentiment turns.

For now, though, the mood is decidedly bullish. As one trader put it, "When the fast money is piling back in, you want to be on the same side." Whether that holds remains to be seen, but for the second week in a row, hedge funds are voting with their feet—and they're voting for stocks.