①Goldman Sachs’ trading department stated that short positions held by U.S. equity hedge funds have reached a new high in nearly three and a half years. If the war in Iran ends, it may trigger significant short covering, driving a sharp rise in the U.S. stock market; ②Data shows that speculative investors are maintaining bullish positions on individual stocks while hedging through shorting ETFs and index futures. Their total risk exposure is currently close to historical highs.
Cailian Press reported on March 12 (edited by Liu Rui) that Goldman Sachs’ trading department noted that short positions of hedge funds in the U.S. stock market have hit a new high in nearly three and a half years. Once favorable news emerges about the end of the Iran war, it could trigger large-scale short covering and propel a surge in U.S. equities.
Short positions in the U.S. stock market have reached a new high in three and a half years.
Data from Goldman Sachs indicates that following the outbreak of conflict in Iran, speculative investors have largely maintained bullish positions in individual stocks while constructing hedging positions by shorting products such as exchange-traded funds (ETFs) and index futures.
Goldman Sachs’ institutional brokerage team stated that short positions in the U.S. stock market have now reached their highest level since September 2022.
This dynamic reflects how the market is grappling with uncertainties stemming from the Iran war and lingering concerns over credit and artificial intelligence.
However, John Flood, head of Goldman Sachs Americas Equity Execution Services and partner, indicated that if positive news emerges, it will prompt investors to unwind these hedges, potentially driving a substantial rise in U.S. stocks.
Flood said during an interview:
“If there is a headline announcing the end of the conflict, you might see a significant rally in indices. It could spike straight up by 2% to 3%, with most of that being macro product unwinds.”
The bank noted that hedge funds’ total risk exposure (a measure of both long and short position values) is currently nearing historical highs at 307%. Nevertheless, Flood stated, “Right-tail risks are currently more extreme than left-tail risks,” referring to a greater likelihood of a major upward movement in the market.
Given the extremely high total exposure and the substantial scale of short positions in macro products, any positive news could trigger aggressive short-covering.
In fact, a smaller-scale version of the scenario described by Froed occurred this Monday — when U.S. President Trump claimed that the conflict with Iran would be ‘resolved very quickly,’ causing the S&P 500 Index to rebound sharply after an early drop of 1.5%, eventually closing up by 0.8%. Traders noted that the rise in U.S. stocks that day was largely driven by market participants covering their short positions.
Long-only institutions remain on the sidelines.
Goldman Sachs stated that the sudden outbreak of the Iran conflict caused significant volatility across all sectors of the U.S. stock market last week, resulting in hedge funds losing approximately 4% of their performance year-to-date.
According to Froed’s observations, most long-only asset management firms (including traditional asset managers and sovereign wealth funds) are currently adopting a wait-and-see approach.
Froed stated: ‘Investors employing long-only strategies performed exceptionally well from the beginning of this year until before the outbreak of the Iran conflict. However, given the current uncertain macro environment and heightened market volatility, many investors have chosen to adopt a wait-and-see stance, awaiting more clarity.’
Goldman Sachs also observed that some companies are taking advantage of the recent pullback in stock prices to repurchase their own shares — last week, Goldman Sachs’ corporate share repurchase department experienced its busiest week executing buybacks in three years, which has provided some support for U.S. equities.
Nevertheless, Goldman Sachs warned that although retail investors remain a key source of demand for equities, their support may weaken if there is a material deterioration in the U.S. labor market.
Froed stated: ‘If we see multiple negative employment data releases, it will be concerning because retail investors might withdraw capital, leading to potential sell-offs in the market… We currently do not believe this scenario has occurred, as last week’s non-farm payroll report was merely a single instance of negative data.’
Editor/Rocky
