Popular hedge fund bets have been hammered this week, with long positions underperforming the broader market and shorts outperforming — a sign of industry retrenchment amid a dash for cash.
After mostly outperforming the US stock market since the coronavirus started rattling investors in mid-February, a Goldman Sachs index of popular hedge fund holdings has underperformed the S&P every day this week, and is now down almost 29 per cent for the year.
At the same time, the US bank’s index of popular short positions — when hedge funds bet on a stock declining — has been more resilient than the US stock market over the same period, declining only 13 per cent this year. The five-day outperformance of the hedge fund shorts index versus the hedge fund longs index is the most extreme seen since Goldman Sachs started collecting the data in 2001.
Some analysts said that the widening divergence this week was symptomatic of many hedge funds throwing in the towel, ratcheting back their bullish bets and covering their short positions to move into cash.
“Hedge fund deleveraging started last Friday then reached a full-blown crisis this week,” said Yin Luo, head of quantitative strategy at Wolfe Research. “Deleveraging was faster and far more severe than even the 2008 global financial crisis.”
On the whole, hedge funds have struggled to shine amid the current turmoil, but most have managed to do markedly better than the broader markets.
Hedge Fund Research’s daily index of the performance of several hundred big funds indicates that they have on average lost 6.4 per cent this month, and 7.4 per cent this year. Equity-focused hedge funds have declined 10 per cent, about half the decline of the global equity markets.
However, with volatility remaining ferocious, there are indications that resilience could be wearing thin. Almost every asset — even supposed safe havens such as government bonds and gold — has sometimes been selling off in tandem with equities, whipsawing many investment groups.
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Mr Luo estimated that the magnitude of the hedge fund deleveraging in recent days surpassed even the previous peaks seen at the height of the financial crisis, as losses spur investors to yank out money from hedge funds and banks to call in loans, and force money managers to sell positions to raise cash.
“Investors rush to sell whatever liquid assets to cover their margin calls. The redemptions and losses force enormous de-risking by multiple strategies,” he said. “In the equity space, managers are forced to liquidate stocks, industries and factors that have held up reasonably well . . . to cover their short positions.”
Even big names such as Renaissance Technologies and Bridgewater have reported disappointing numbers in recent days. “It’s hand-to-hand combat right now,” said the head of one hedge fund group.
Goldman Sachs analysts argued that more pain could be coming. “Hedge fund leverage remains higher than typical in periods of severe market stress, and the valuations of their favourite stocks remain elevated relative to history,” the bank noted in a report on Thursday.