Drukenmiller said watch out when liquidity reverses. Put/call ratio suggests that easy gains are most likely behind us. Hedge funds fear another reckoning for global stocks.

Hedge funds fear another reckoning for global stocks

Hedge funds are getting ready for another slide in stock markets after growing uneasy that surging prices do not reflect the economic problems ahead.

Some managers fear that equity investors — used to buying the dips during the decade-long bull market that ended in March’s sharp sell-off — have become too complacent about how quickly economies can recover from the pandemic and how effective stimulus packages from central banks and governments can be.

The S&P 500 index completed its best 50-day run in history on Wednesday, said LPL Financial, closing within 8 per cent of its record high of mid-February.

“The markets are priced to perfection,” said Danny Yong, founding partner at hedge fund Dymon Asia Capital in Singapore. “The stability in equity markets does not reflect the job losses and the insolvencies ahead of us globally.”

Mr Yong has been buying put options — which protect against market falls by allowing their owner to sell at a predetermined price — on stock indices and also on currencies sensitive to risk appetite such as the Australian dollar and the Korean won.

“I believe we will see new lows in global equity markets later this year,” he added. “As March . . . has shown us, prices cannot diverge from fundamentals for too long.”

Other hedge fund managers have expressed concerns about the sharp rebound in stocks from the March lows.

Stanley Druckenmiller, a protégé of George Soros who stepped back from managing outside money a decade ago, recently said he expected a wave of bankruptcies and that a V-shaped economic recovery was a “fantasy”.

Paul Singer’s Elliott Management, which has $40bn in assets, wrote in its most recent letter to investors that, since the impact of the economic downturn was greater than that of the 2008 financial crisis, “our gut tells us that a 50 per cent or deeper decline from the February top might be the ultimate path of global stock markets”.