Hedge funds, retail investors buy stocks in February on bullish economic view

This article highlights capital flows data available from S&P Global Issuer Solutions. For more information on this and other Issuer Solutions products, please contact Christopher Blake, executive director, at christopher.blake@spglobal.com.

Inflation fears continued to drive institutions out of stocks in February, while hedge funds and retail investors took a seemingly contrarian view, buying stocks throughout the month on expectations of an improved economy.

Hedge funds, which began 2023 as sellers, were buyers of stocks throughout February, boosting inflows of equities by nearly $9.9 billion throughout the month, according to the latest S&P Global Market Intelligence data. Institutions — including traditional asset managers and other large, long-only investors — remain major sellers of stocks, increasing outflows of stocks by more than $21.7 billion in February.

"Institutional investors appear to be following more mainstream concerns that inflation will not improve in the near term, while hedge funds are making more bullish bets on the economic outlook," said Christopher Blake, executive director of S&P Global Issuer Solutions.

In the 12 months through February, institutions have steadily increased outflows of stocks, reaching $343.7 billion.

The continued outflows are a sign of inflation concerns and a risk-off approach to positioning. Institutional investors are moving more towards fixed-income investments and could be rotating more into index funds and ETF investments, Blake said.

Capital flows for index funds and ETFs fell by $2.5 billion, but remain net positive on the year at $87.6 billion.

"This is typically more representative of overall equity sentiment as opposed to a single driver of activity," Blake said. "This would suggest to me that while the rotation from active to passive investing is an important long-term trend, it was slightly less at play in the month of February."

Retail and hedge funds

Hedge funds record $466.7 million in outflows in the 12 months through February. Outflows from hedge funds appeared to bottom out in mid-August 2022 when they totaled more than $22.4 billion.

Retail investors, meanwhile, saw outflows totaling over $18.4 billion in the 12 months through February. Outflows bottomed out at more than $28.3 billion near the end of January. Retail investors bought about $7.2 billion in stocks in February.

Sector flows

Institutional investors continued to reduce exposure to energy stocks in February, with flows falling 1.1% during the month. The group also reduced exposure to technology stocks by 0.5% after increasing exposure by 0.5% in January. Institutions also shifted on utilities, increasing exposure by 0.4% in February after a 0.6% reduction in January.

"While this did not play out across every sector, we believe this growth-to-value shift was a driver of institutional reversals for both technology and utilities, two sectors traditionally associated with growth and value, respectively," Blake said.

Hedge funds increased their exposure in February in every sector except communication services and financials.

They "appear to generally be taking a more positive outlook on macroeconomic factors, which would lead to a reversal in a sector like technology and overall inflows," Blake said.

Retail investors continued to increase exposure to energy and real estate in January and February while reducing exposure to healthcare and communication services.

Index funds and ETF reduced exposure in February to utilities, consumer discretionary, energy, materials and consumer staples, after increasing exposure to those five sectors in January.

Data and insights for this article were compiled by Matthew Albert, Mark Buckles, and Christopher Blake from S&P Global Issuer Solutions.