Hedge funds sped up de-risking, and there likely is more to come

NEW YORK – Global hedge funds accelerated the unwinding of stock positions on Monday, and this trend is likely to continue, as portfolio managers seek to reduce risk amid a selloff in US stocks, according to Goldman Sachs.

“Through yesterday, our best guess is that we are currently in the middle innings of this (de-risking) episode,” said Goldman Sachs Vice President Vincent Lin, although he pointed out that determining a de-risking duration is difficult.

Portfolio managers usually try to minimize their losses by unwinding trades over an extended period amid a selloff. It’s a way to avoid flooding the market with mammoth blocks of stocks, a move that could help move stock prices further down.

The prolonged de-risking means it could take a while for stocks to recover.

The unwinding on Friday and Monday represented the largest two-day deleveraging in four years, with industrials leading the pack, Goldman Sachs said in a separate note, adding that the exit from industrials was at a record high.

The bank said that the de-risking had accelerated from Friday, a trend it had previously compared with some early COVID pandemic unwinding.

Hedge funds cut their equity exposure on Monday as a steep selloff drove the S&P 500 index to its biggest one-day drop since December 18 and the Nasdaq Composite Index plunged 4% on fears of a recession triggered by US President Donald Trump’s tariffs on imports.

Tariffs have spooked investors, with fears of an economic downturn sparking a selloff in equities that has wiped out roughly USD 4 trillion from the S&P 500’s peak last month.

Goldman Sachs said portfolio managers ditched both long and short bets on specific stocks on Monday.

Hedge funds’ risk-shedding strategy seems to be paying off. Fundamental long/short, systematic, and multi-strategy hedge funds posted positive returns on Tuesday, the bank said.

(Reporting by Carolina Mandl in New York; Editing by Richard Chang and Lisa Shumaker)