Severely under-positioned, unable to keep up with the U.S. stock market rebound, hedge funds engage in "panic buying."

The US stock market has rebounded strongly to historic highs, leaving many hedge funds in an awkward predicament—their positions are significantly lagging behind the market, forcing them into panic buying.

The S&P 500 index recently broke through 7000 points, hitting a record high. Core sectors such as AI, semiconductors, and tech hardware have generally recovered and surpassed their "pre-conflict" levels. However, according to UBS trader Conor Lyons in a recent report, while hedge fund performance data shows participation in this round of repricing, overall positioning data indicates net exposure has not kept pace.

This mismatch is forcing hedge funds into near blind chasing of gains, directly fueling the recent abnormal activity in the options market—yesterday (April 15) saw the largest single-day call options volume since 2026.

Goldman Sachs Delta-One business head holds a similar view. Currently, funds are flowing one way, with CTAs, clients, and various participants generally under-allocated, competing to chase gains. This structure has created an effective upside short Gamma pattern, further strengthening the market’s sustained upward momentum.

Hedge fund positions lag, long-short ratio drops to lows

UBS data shows last week’s hedge fund outflows marked the largest weekly net selling since 2026, driven by both active reduction of longs and new short positions. Long reductions were concentrated in US tech hardware, while new shorts mostly targeted US software.

More notably, the current hedge fund long-short ratio remains below the peak level seen during the "tariff day" panic sell-off, when the stock market was far below today’s heights. This means that, despite the S&P 500’s return to historic highs, hedge funds’ overall net exposure remains relatively low, with only slight over-allocation.

Retail investors have also failed to keep up with this rebound. UBS data shows last week’s retail outflows hit the largest of the year, highly concentrated in the semiconductor sector. The prevailing retail investor strategy is selling into rallies rather than buying dips—even though the market hardly offers obvious pullback opportunities anymore.

CTAs turn bullish, but plenty of room to add

Among systematic strategy groups, Commodity Trading Advisors (CTAs) are the main buying force in this rally. According to UBS, CTAs have shifted from net short to net long since last week, but their current exposure is only at the 31st historical percentile, meaning CTAs still have considerable room to add if the market continues upward.

Risk control strategies have not yet become effective buyers, restricted by relatively high realized volatility recently, with their exposure nearly unchanged from last period. However, UBS estimates that if the S&P 500 stabilizes and daily volatility narrows within ±50 basis points, risk control strategies could buy about $185 billion in the next month.

Goldman’s Delta-One business head points out that the current positioning structure actually creates a short Gamma effect on the upside, continually reinforcing the market’s upward inertia. He also mentioned that, on the index level, the S&P 500’s Gamma is relatively long-biased, helping suppress volatility even as the market moves higher. However, he does not personally agree with the logic of chasing gains, but he fully respects the potential continuation of technical momentum.

The structural changes in the options market are worth noting. Options analytics firm SpotGamma points out that with today’s (April 15) VIX options expiry, the previously accumulated positive Gamma protection has significantly dissipated, expanding the market’s exposure to two-way volatility.

SpotGamma identifies the S&P 500’s key pivot near 6900 points, with resistance at 7000 and 7020, and support near 6800. The fading of positive Gamma means the options hedging mechanism that previously helped suppress volatility and smooth upward moves has weakened significantly, opening up room for volatility in both directions.

Earnings season becomes a key test

UBS summarizes in their report that the current positioning pattern shows that, in the absence of major geopolitical risk shocks, the path of least resistance for the stock market remains upward. However, corporate earnings season will pose a critical short-term hurdle.

The options market currently prices the S&P 500’s average single earnings event volatility this quarter at 5.3%, slightly higher than historical levels. Implied volatility premiums are most pronounced in tech, industrials, and materials, reflecting the highest uncertainty pricing for these sectors’ earnings results.

For investors, the core market contradiction is: under-positioned institutions are forced to chase gains, pushing the market higher; but as Gamma protection diminishes and earnings season approaches, the market’s ability to cushion negative shocks is simultaneously falling.

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