Q2 2020 Hedge Fund Industry Data

By Q2 2020, the Federal Reserve was buying billions in bonds daily and explicitly backstopping the corporate credit market. Simultaneously, the U.S. government passed the CARES Act, injecting trillions directly into the economy. This unprecedented dual-stimulus caused equities to soar, even while much of the physical global economy remained locked down. Technology stocks, specifically those enabling remote work and e-commerce, experienced massive multi-year expansions in valuation multiples.

Having survived the March liquidity crisis, regulatory focus shifted toward the massive structural shifts occurring in the market. The OFR noted the extraordinary speed at which hedge funds re-applied leverage. The moral hazard debate intensified, as the explicit Federal Reserve backstop essentially guaranteed risk-taking behaviors, leading to Gross Notional Exposure jumping back up to $21.8 trillion.

Entering the second half of the year, funds were heavily long U.S. equities, particularly mega-cap technology. The primary risks were highly binary: the success or failure of ongoing vaccine trials, and the outcome of the impending highly contentious U.S. Presidential election.