(Bloomberg) — Hedge fund positioning across US equities has created a setup for stocks to rip higher after their recent wobble, according to Goldman Sachs Group Inc.’s trading desk.
Speculative investors have largely held on to their bullish positions in individual stocks while building hedges through bearish bets on products such as exchange-traded funds and index futures. That short exposure now stands at the highest level since September 2022, data from the bank’s prime brokerage team show.
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The dynamic reflects a market grappling with uncertainty stemming from the Iran war, as well as credit fears and worries over artificial intelligence. It could also, however, fuel outsized gains if good news pushes investors to unwind those hedges, according to John Flood, Goldman’s head of Americas equities execution services and partner.
“If we were to get a headline declaring the conflict over, you could see a sharp move higher at the index level,” Flood said in an interview. “It could be 2% to 3% in a straight line, and most of that would be that macro product covering.”
Gross exposure among hedge funds, which measures the total value of long and short positions, is currently near an all-time high at 307%, the bank said.
However, “right tail risk is more extreme than left tail risk right now,” Flood said, referring to the potential for a sharper upside move. “Because gross exposure is so high and we’ve seen so much shorting in macro products, any positive headline could trigger aggressive covering.”
Investors had a taste of that type of action on Monday, when President Donald Trump said the war with Iran would resolve “very soon.” The S&P 500 closed 0.8% higher after an earlier 1.5% drop, with traders attributing much of the move to market participants buying back the securities they had shorted. The index remains nearly 3% off its highs, though losses in many individual stocks are far larger.
‘No-Man’s Land’
The volatile backdrop has already taken a toll on investors. Fundamental long-short hedge funds lost about 4% of their year-to-date performance last week amid sharp rotations across sectors, according to Goldman.
Other types of hedge funds have yet to make decisive moves. Long-only asset managers — including traditional money managers and sovereign wealth funds — are largely in wait-and-see mode, Flood said.
