HF Highlights 2026.09.18

Weekly HF Highlights: HFs Continue to Rotate into Quality > Momentum, L/S Fund Gross and Net Lev Light

Prime Brokerage – Strategic Content Group

FOR INSTITUTIONAL USE ONLY. Not a product of Morgan Stanley’s Research Department. Any usage of the word “we” in this document refers solely to the Prime Brokerage Strategic Content team.

This material is not a solicitation of any offer to buy or sell any security or other financial instrument or to participate in any trading strategy. This material was not prepared by the Morgan Stanley Research Department. Please refer to important information and qualifications at the end of this material. The information contained herein does not constitute advice. Morgan Stanley is not acting as your advisor (municipal, financial, or otherwise) and is not acting in a fiduciary capacity.

This Week’s Highlights (as of Thursday, September 17th) All major regions ended net sold through this week as HFs added to shorts across Global equities – well-owned pockets of EU equities led the net selling in notional terms, followed by supply across APAC AI-related themes. US equities also titled net sold with short adds narrowly outpacing what was added long as HFs reduced directional tilts ahead of Wednesday’s FOMC. Though, the group returned to buying via long additions during Thursday’s relief rally. Re-grossing efforts have ultimately persisted across the US and now mark a ~2% active increase in N. Am gross exposure, which still falls slightly short of the ~3% average typically expected through September. However, this activity has not translated directly into additional directional risk – US L/S fund net leverage increased from near 12m lows (50%) ahead of Wednesday to close Thursday at 53%, which still sits below 12m medians (36th %tile). US L/S fund gross leverage also remains on the lighter end at 209% (18th %-tile vs 12m), pointing to HF positioning having yet to recover from shorter-term troughs. While the re-grossing efforts had been more controlled ahead of the FOMC, HFs continued to moderate factor tilts as the rotation away from Momentum and into Quality persisted. The Semis complex led the selling activity as HFs continued reducing directional tilts in the theme amidst the AI weakness early this week, with selling also extending to the AI Tech complex more broadly (MSXXAIB). However, demand for Hyperscalers (MSXXHYPR) continued to stand out as a higher-quality AI expression, followed by demand in Optical Networking (MSXXNTWK) and Cybersecurity (MSXXCYBR). The demand in Cybersecurity has helped lift Software positioning from record lows to the 9th %-tile on a 5Y basis, representing early stages of recovery. Outside of Tech, HFs were net sellers of Discretionary as well as Industrials / Energy – broadly from a thematic perspective, the selling was led by Late Cycle Cyclicals (MSXXLCYC). However, there were few pockets of demand in Financials (Payments, Large Cap Banks), Materials (Metals/Miners) as well as continued covering in crowded Biotech shorts (MSXXBIOS). EU equities ended net sold in every session this week as HFs reduced directional risk across the most well-owned themes in the space – EU Semis, EU Banks and EU Defense drove the net selling in outsized amounts. HF net exposure to EU equities remains near longer term troughs in just the 20th %-tile on a 5Y basis as HFs have continued to rotate away from the region into US equities. APAC also contributed to the net selling flow with the activity concentrated in South Korea and Taiwan as HFs continued to unwind exposure across well-owned Asia Semis and Data Centres. Japan also contributed to the net selling as HFs also unwound longs in size from JP Semis, however, there were early signs of broadening as HFs also added to longs across Japan Brokers / Fintech (MSAPJBFT), Regional Banks (MSAPREGB) and JP Defense (MSAPJDXX). PnL wise, this week was challenging for global L/S funds amidst the AI weakness – despite moderation in positioning, Global Semis and Hardware still account for a large share (~25%) of global HF net exposure, despite being down from ~40% at peaks. The average global L/S fund gave back -94bps vs. the MSCI down -47bps.…