Hedge fund activity intensified towards the end of last week, potentially impacting European hedge fund managers' returns, as indicated in a JPMorgan note seen by Reuters.
Hedge funds made significant moves in single stocks on Friday, marking the largest activity in over two years. This raised concerns similar to those seen during the pandemic, where managers reduced market exposure.
Following worries about U.S. growth and German fiscal reforms, European shares fell on Tuesday. Selling large quantities of equities can drive down stock prices and affect market values, triggering small funds to exit positions to limit losses.
Bruno Schneller of Erlen Capital Management highlighted the vulnerability of smaller hedge fund managers when larger funds shift their strategies, creating turbulence that can capsize them due to their limited resources and flexibility.
The JPMorgan note noted that stock pickers and multi-strategy hedge funds across asset classes were forced to adjust their positions. Hedge funds with short positions suffered when larger funds covered their short positions, boosting stock prices.
Despite ongoing concerns about crowded trading positions, JPMorgan reported that stock pickers saw a 2.5% decline in February and were down 1.6% in 2025. Multistrategy funds were down 1.7% in February and 1.6% for the year.
The European markets post-Brexit are described as fragmented, with lower trading volumes and reduced participation from long-term investors, potentially amplifying the impact of any deleveraging shock across borders, particularly affecting smaller exchanges.