Hedge funds unwound single-stock positions at the fastest rate in more than two years on Friday, with some de-risking activity resembling the mass sell-offs of March 2020, when fund managers scrambled to reduce market exposure amid the pandemic, according to a Goldman Sachs note released Monday.
On Monday, U.S. stocks tumbled, with the Nasdaq (.IXIC) plunging 4%, as investors reacted to growing fears that President Donald Trump’s tariff policies could push the U.S. economy into a recession.
“It was a classic de-leveraging crunch,” said James Koutoulas, CEO of Typhon Capital Management.
According to Goldman Sachs, hedge fund single-stock sales hit their highest level in more than two years. The bank also noted that some large de-risking moves—where funds unwound major concentrated trades—were reminiscent of March 2020. Additionally, January 2021 was cited as another comparison point, when hedge funds were forced to cover short positions during the meme stock frenzy fueled by retail traders.
The hedge fund unwinding comes at a time when industry leverage is at record levels. A separate Goldman Sachs note revealed that hedge funds’ equity positions are leveraged at 2.9 times their books, the highest in five years.
Some investors told Reuters they worry that highly leveraged funds may continue de-risking in the coming days, potentially delaying any market recovery.
Hedge funds unwound both long and short positions, particularly those identified by Goldman Sachs as "crowded trades", meaning they were widely held by many investors.
Goldman Sachs observed a risk-off trend in 10 of 11 global sectors, with industrials seeing the biggest losses. The sell-off was broad-based across all regions, but particularly pronounced in the U.S.
Before the market’s deeper decline on Monday, equity long/short hedge funds were already down 1.5%, while systematic managers had lost 0.3%, according to Goldman Sachs.
