Hedge funds remain underweight UK equities
Global hedge funds and institutions are a net 37% underweight UK equities, the most negative position since August 2020, as capital shifts into cyclical and technology stocks.
Bank of America’s latest global fund manager survey shows global hedge funds and institutional investors are a net 37% underweight UK equities, the most negative positioning since August 2020. Managers have reallocated capital into cyclical and technology sectors that have driven gains this year.
Technology companies account for about 1.2% of the FTSE 350. Consumer staples and healthcare together make up roughly one-third of the index. Energy represents a large share of the benchmark, making UK equities more sensitive to moves in oil prices.
Weak domestic growth, higher interest rates and political uncertainty linked to Prime Minister Keir Starmer’s expected departure have reduced demand for UK assets. Goldman Sachs reported domestic mutual funds recorded nearly £20 billion of net outflows in the first quarter. The bank added that pension funds and insurers have been trimming domestic equity exposure, retail investors have remained cautious, and foreign investors were modest net buyers overall.
Event-driven and merger-arbitrage hedge funds are active in London, attracted by companies trading at discounts. Recent takeover interest has included bids for EasyJet, an approach by Xavier Niel for Emirates Telecommunications Group’s stake in Vodafone, and Prologis’ approach for logistics property group Segro. Overseas buyers and private equity firms continue to target UK-listed acquisition candidates.
The FTSE 350 trades at roughly a 35% discount to the MSCI World Index. Analysts say part of the gap reflects the UK’s sector mix, but valuations remain lower after adjusting for industry composition. The survey lists the UK among the leading contrarian trades and records investor interest in the market as a potential hedge if global growth weakens.
Laura Foll, UK equities portfolio manager at Janus Henderson Investors, attributed the level of takeover activity to the valuation gap between UK and US-listed companies and highlighted a rise in share buyback programmes as companies repurchase stock to offset outflows and take advantage of lower valuations.
Major investment banks hold mixed views: Barclays prefers eurozone equities, JPMorgan maintains a neutral stance on the UK, and Citigroup has downgraded UK equities to underweight.
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