Hedge Funds Sold $1 Trillion Early 2025: Sell Before May or Hold the Rebound?

Federal Reserve Governor Harker stated that if the economic data in June provides a "clear and convincing direction," a rate cut may happen in June.

Following comments from Waller and Harker, $NASDAQ(.IXIC)$ rose by over 2.7%, marking its third consecutive day of gains exceeding 2%, the first such occurrence since May 2001. $Dow Jones(.DJI)$ increased by more than 1%, and $S&P 500(.SPX)$ rose by 2.03%. $Tesla Motors(TSLA)$ closed up 3.50%, and $NVIDIA(NVDA)$ gained 3.62%.

Stronger-than-expected earnings reports supported the rebound in US stocks.

Goldman Sachs believes the reasons for the rebound are becoming more compelling. One reason U.S. stocks have managed to stabilize is the relatively decent performance of recent corporate earnings reports.

While many companies have withdrawn previous earnings guidance, the downward revisions have generally not been severe.

Goldman Sachs notes that "with signs of de-escalation in the trade war, light positioning (U.S. net long and short fund leverage is near a five-year low), and improvements in market technicals, the case for betting on a stock market rebound is becoming increasingly strong."

After hedge funds have sold around $1 trillion, is it time to switch to a rebound?

JPMorgan points out that most of the U.S. stock sell-off since the beginning of the year has come from equity-focused hedge funds, with a total reduction of around $750 billion.

Another significant source of sell-offs has come from hedge funds relying on momentum strategies, such as CTAs. These funds began to unwind their large long positions in mid-February and turned to short positions in early April, with the total sell-off amount expected to be around $450 billion.

Meanwhile, short interest in the S&P 500 ETF has surged since early 2025.

In contrast to hedge funds, individual investors continue to buy US stock ETFs, with monthly net purchases maintaining a steady pace of around $50 billion. JPMorgan's report highlights that the continued buying from individual investors is an important support factor for the U.S. stock market.

With the May effect approaching, should investors sell in advance or continue holding?

The question now facing investors is whether markets will deteriorate further during the historically weaker period between May and October.

A 2022 study analyzed stock returns across 37 countries and found that returns from November to April were significantly higher than those from May to October.

A more recent 2023 study by Manulife Investment Management compared the "Sell in May and go away" strategy with a buy-and-hold approach over a 50-year period.

The findings showed that the buy-and-hold strategy generally outperformed the seasonal approach, suggesting that while the seasonal pattern exists, attempting to time the market based on this strategy may not be advantageous for investors.

1. How do you cope with May seasonal pattern?

2. Would you sell in advance or keep holding?

3. Have you bottomed hunting cheap stocks in previous selloff?

4. Is it time to switch or prepared for more pains?

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