Goldman Sachs reported that hedge funds recently executed their largest single-stock closures in over two years, reminiscent of the market conditions in March 2020 when managers reduced exposure during the pandemic. The sell-off coincides with a significant drop in major U.S. indices, with the Nasdaq falling 4% amid fears that tariff policies could push the U.S. economy into recession.
James Koutoulas, CEO of Typhon Capital Management, described the situation as a typical deleveraging crisis. Hedge funds have been offloading single stocks at an unprecedented scale, with some actions comparable to March 2020. The report also referenced January 2021, when hedge funds were forced to unwind short positions in popular meme stocks.
This unwinding comes as the hedge fund industry's leverage reaches record levels. Another Goldman Sachs report highlighted that the overall leverage of hedge fund stock positions is 2.9 times their book value, marking a five-year high. Some investors express concern about the potential for highly leveraged hedge funds to further reduce risk, possibly hindering market recovery.
Hedge funds have been reducing what Goldman describes as crowded long and short positions. The bank observed risk-averse trends in 10 out of 11 global sectors, particularly in industrials. Data showed that on Monday morning, before further declines in major indices, equity long-short hedge funds were down 1.5%, while systematic hedge funds dropped 0.3%.
