By Carolina Mandl
NEW YORK (Reuters) – Global long/short hedge funds, those that bet stocks will fall or rise, were forced to unwind bearish bets that were dragging down performance for most of July, a Goldman Sachs report showed on Monday.
Long/short are on track to post the worst monthly so-called alpha performance since May 2022, which considers gains in excess to benchmark indexes.
Long/short hedge funds had nine consecutive days of negative alpha returns prior to July 28, the longest streak since January 2017, Goldman Sachs said.
“This was mainly driven by a sharp degradation in short side alpha, but we saw a meaningful deterioration in long side performance in the past week as well,” the report seen by Reuters said. A graphic showed alpha returns were down roughly 1% for the month.
Goldman Sachs runs one of the world’s biggest prime brokerages, a banking unit that provides lending and trading services to investors and is able to see how large hedge funds and asset managers are moving.
Global long/short hedge funds were still up 0.49% in July through Friday, driven by the overall stock market rally, which tends to benefit their long bets, a different Goldman Sachs report showed on Friday. The S&P 500 index rose roughly 2% in the same period.
Overall, different hedge fund strategies have been forced to unwind their short positions to avoid further losses at a fast pace in July amid a market rally, the bank said.
“July is tracking to be one of the largest active de-grossing months for hedge funds in recent years,” it said, adding there had been few times in the past 10 years when the de-risking move had been as high or higher.
Given the massive recent de-risking, Goldman Sachs wrote hedge funds may be close to finishing line of this trend.
“All things considered, we believe the signs of capitulation are starting to emerge and we might be getting closer to the latter innings of the current de-risking episode.”
(Reporting by Carolina Mandl in New York; Editing by Mark Porter and Alison Williams)
