Hedge Funds Scale Back Exposure Amid Market Volatility, Goldman Sachs Reports

In a notable shift reflecting heightened market caution, hedge funds significantly reduced their positions in individual stocks on Friday, marking the largest decline in over two years. This trend bears similarities to the initial market reactions observed in March 2020, when fund managers sought to lower their exposure amid the onset of the COVID-19 pandemic, according to a recent analysis from Goldman Sachs.

The downturn in the U.S. stock market was pronounced, with major indices such as the Nasdaq experiencing a drop of 4%. This decline has been linked to increasing concerns over President Donald Trump's tariff policies, which many fear could potentially lead the U.S. economy into a recession.

James Koutoulas, CEO of Typhon Capital Management, described the situation as a typical 'de-leveraging crunch,' emphasizing the urgency with which hedge funds are acting to mitigate risk.

Goldman Sachs highlighted that the scale of stock sales by hedge funds was unprecedented in recent years, illustrating a trend where many funds sought to de-risk concentrated holdings. This behavior is reminiscent of previous market adjustments, including the significant covering of short positions in meme stocks during January 2021, a period marked by heightened retail investor activity.

The current unwinding of positions comes at a time when leverage among hedge funds has reached record levels. A separate analysis from Goldman Sachs indicated that the overall leverage in equity positions among hedge funds stood at 2.9 times their net assets, the highest observed in the past five years.

Investors have expressed concerns that some highly leveraged hedge funds may continue to unwind their positions in the coming days, which could hinder any potential recovery in the markets.

In their analysis, Goldman Sachs pointed out a prevailing 'risk-off' sentiment across ten of the eleven global sectors, with notable weakness in industrials. This trend was not confined to the U.S. market, as it was evident across various regions worldwide.

As of Monday morning, prior to a further decline in major stock indices, long/short equity hedge funds reported a decrease of 1.5%, while systematic managers noted a drop of 0.3%, according to data compiled by Goldman Sachs.