Increased volatility in European stocks driven by hedge funds seeking quick profits

From Investing.com: 2024-07-15 01:20:40

European companies are experiencing extreme stock price volatility during earnings reports, with average daily moves 18% higher than eight years ago. Hedge funds seeking quick profits are driving this trend, resulting in the largest swings in share prices since 2016. Long-term investors have left the market, leaving it susceptible to short-term money influences.

Multi-strategy hedge funds, market structure changes, and reduced trading volume have amplified hedge funds’ influence on European stock markets. More financial activity is shifting away from traditional banking sectors, with hedge funds expanding their reach globally. Increased market inefficiencies and higher investor risk may deter long-term investors.

The European securities watchdog, ESMA, acknowledged the drop in stock exchange liquidity, while the number of daily stock trades on public exchanges has decreased since 2020. Earnings days show an average 5.13% swing in share prices for top European companies, up from 4.34% in 2016. Increased short-term focus by hedge funds may divert companies from long-term strategies.

Hedge funds can trigger significant stock price movements, as seen with Swiss lender UBS surging over 10% after hedge funds were forced to buy stock to close losing positions on an earnings report. Europe’s stock market structure changes have boosted hedge fund trades, with passive funds holding 41% of tracked stocks and hedge funds ramping up bets and leveraging with debt.



Read more at Investing.com: European stocks are seeing outsized moves as hedge funds drive trading By Reuters