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Hedge funds have slashed their bets on equities and cut their borrowings from banks as they struggle to deal with surging market volatility triggered by US President Donald Trump’s global trade war.
A sharp stock market sell-off in recent weeks on concerns about Trump’s tariffs has hit the sector particularly hard. Goldman Sachs’ Hedge Industry VIP index, which tracks funds’ most popular buys such as ad group AppLovin, chipmaker Broadcom and energy group Vistra, has tumbled 12.5 per cent since February 19 — when the S&P 500 hit a record high — compared with an 8.6 per cent drop in the blue-chip index.
As a result, hedge fund managers have aggressively cut back the size of their leveraged bets as they try to limit losses, by reducing the amount they borrow from banks to buy or bet against shares.
The reduction in gross positions — the combination of bets on and bets against shares — by hedge funds on Friday and Monday was the largest in four years, according to a report from Goldman Sachs, and one of the largest in the past 15 years.
“There is a lot of pain out there,” said an executive at one large hedge fund. “The only way to defend yourself in the environment today is to cut your leverage.”
Among funds to have been hit during the market volatility is Izzy Englander’s Millennium, which manages close to $75bn in assets. It lost 1.4 per cent last week to Thursday, according to a person who had seen the numbers, having already been down 0.8 per cent this year to the end of February.
Ken Griffin’s hedge fund Citadel, which runs $66bn in assets, was down 0.3 per cent this year to the end of February, although Balyasny was up 3.5 per cent in its main fund.
Millennium and Citadel declined to comment.
Trump’s on-off approach to tariffs on US trade partners has roiled markets, while a crackdown on immigration and cuts in the public sector have led to fears that inflation may surge and GDP growth could slow.
The Vix, Wall Street’s so-called fear gauge, which measures the market’s expectations of fluctuations in stock prices, has surged to its highest level since August last year.
Three people working at different multi-manager hedge funds — which use numerous teams of traders, large amounts of leverage and tight risk management — said the reduction in positions was the biggest they had seen since at least late 2018, when markets sold off sharply.
Rapid reductions in hedge fund leverage by multi-managers can lead to stocks falling more than they otherwise would, “amplifying market moves”, said Bank of England Governor Andrew Bailey last month.
Hedge fund executives say the current environment has led to a more volatile market in which it is harder to pick which stocks will do well or badly in the short term.
“[There has been a] paradigm shift which means different stocks will lead, valuation premiums change,” said one multi-manager hedge fund executive.
Stocks in Goldman Sachs’ most popular hedge fund short index have started to outpace the most popular long positions, causing losses for managers.
Fundamental long-short equity funds have on average lost almost 6 per cent since February 18, according to Goldman Sachs data seen by the FT. On a rolling 14-day basis, that marks the funds’ biggest peak-to-trough loss since May 2022.
“These policy changes have been massive and fast,” said one executive. “It’s a different environment now. We have never seen this.”
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