The Silent Surge: How Synthetic Flows Drove the April 2025 US Equity Rally

In April 2025, the S&P 500 surged nearly 20%, stunning investors and defying consensus expectations. Many attributed the move to artificial intelligence narratives or retail FOMO, but beneath the surface, a more structural force was at play. This rally was powered not by sentiment, but by a convergence of synthetic foreign capital flows, dealer positioning, and gamma dynamics, with the plumbing running through Ireland, Luxembourg, and the Cayman Islands.

The Setup - Why Foreign Institutions Added Risk Assets.

Foreign investors, particularly sovereign wealth funds, pensions, and insurers, began re-allocating into U.S. equities in early 2025 for five core reasons:

1. Margin Superiority: US companies maintained higher profitability than their global peers. Data shows that US companies enjoy stronger margins when compared to European and Asian indices. For the quarter US profit margins remained above 11% while Europe and Asia ex-Japan lagged between 6% to 8%, reinforcing the margin premium in US equities.
   

   

   
   
   
   

2. Weak Dollar Entry Point: The DXY fell sharply in April, making USD exposure more attractive. But rather than converting spot FX, institutions used synthetic methods that avoided FX altogether.
   

3. Relative Yield Advantage: Global bonds offered little appeal. US equity earnings yields remained more attractive on a duration-adjusted basis. A Morningstar chart of 10 yr sovereign yields as of April 25 showed US and UK bonds yielding 4.6%, while Germany, China, and Japan lagged at 2.4%, 1.7%, and 1.1% respectively. When compared against the S&P 500’s fwd earnings yield (approx 5.5 to 6% at that time), the risk-reward profile for US equities stood out globally.
   

   

4. Portfolio Rebalancing: Many global funds were underweight US equities after Q1 drawdowns and used Q2 to re-enter beta exposure.
   

5. Tactical Re-Entry at Lows: April marked the bottom of a multi-month equity drawdown. Volatility was elevated, and sentiment was deeply negative. These conditions created an opportunity for large institutions to quietly scale into exposure at attractive levels particularly when they could do so synthetically, without moving spot markets.
   

6. Why Synthetic?: Synthetic tools like UCITS ETFs and total return swaps offer lower cost, higher capital efficiency, and better tax treatment. Institutions avoid 30% U.S. dividend withholding, SEC disclosure burdens, and US custody risk, all while getting full market exposure through regulated, globally accepted European vehicles.
   

The Synthetic Trade - How UCITS ETFs and Swaps Work

Rather than buying US stocks directly, these investors used domiciled etfs like UCITS which are domiciled in Ireland and Luxembourg, or total return swaps (TRS) via Cayman hedge fund structures (primarily due to withholding tax avoidance). Here's how the synthetic trade works:

1. Investor buys CSPX (a synthetic UCITS ETF)
   

2. CSPX enters a total return swap with a dealer (e.g, JPMorgan), receiving the full return of the S&P 500 (price + dividends)
   

3. Dealer hedges their risk by buying S&P 500 futures or the underlying stocks
   

4. Dealer hedging shows up in CFTC CoT data as a rise in long futures positioning

The result: foreign institutions gained full U.S. equity exposure without touching US custody, FX, or tax withholding.

The Proof? What the CFTC, TIC, and Flow Data Reveal

The following data points confirm that synthetic offshore flows were the primary driver of the rally:

• CFTC CoT Data:

  - Asset Managers increased net S&P futures longs by +370,000 contracts from March to May.

  - Dealers flipped from -287K to +45K net exposure, consistent with hedging synthetic inflows.

  - Hedge Funds remained net short throughout, proving they weren’t chasing.
  

• ETF Flow Data:

  - Morningstar: +$39.9B into large-blend US equity funds, almost entirely via passive UCITS ETFs.

  - BlackRock/iShares: NAV and share creation spikes in CSPX and IUSA.
  

• TIC & CIMA Data:

  • Cayman: Record fund registrations in Q125 (17,376 private funds)

  • TIC SHLA: Ireland and Cayman continue to rise in equity holdings of U.S. assets

  • 
    

• Currency Signal:

  • Despite massive equity inflows, the DXY fell, implying no spot FX conversion a hallmark of synthetic USD-funded exposure.
    

  • 
    

    

    
    

Gamma Flow Mechanics - How Dealers Drove Price Higher

As more synthetic exposure hit dealer books, they became short gamma i.e. they had to buy futures as the market went up to remain delta neutral. This created a feedback loop:

1. Foreign ETFs and swaps created exposure

2. Dealers hedged by buying futures

3. Market rallied > dealers bought more > rally accelerated

4. By May, dealers flipped net long

At the same time, retail flows surged (+$50B in April per Goldman), adding more spot buying into the system.

This wasn’t an AI bubble or a meme-stock chase. It was a plumbing-based rally, a structurally delivered re-risking by foreign allocators using synthetic tools, hedged by dealers, and turbocharged by gamma flows. The April 2025 surge was a case study in market mechanics, and the CFTC data, ETF flows, and FX behavior proved it. Understanding this structure isn’t just useful, it’s essential for navigating the next move.