Long/short hedge funds suffer heavy losses from bearish bets in July
Long/short hedge funds suffer heavy losses from bearish bets in July
Global Hedge Funds Forced to Unwind Bearish Bets Amid July Performance Slump
New York, July 31 – 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.
July has been a challenging month for global long/short hedge funds, as they found themselves having to reverse their bearish bets in order to salvage performance. According to a recent report by Goldman Sachs, these funds are on track to record the worst monthly alpha performance since May 2022. Alpha performance measures gains in excess of benchmark indexes, indicating the success or failure of a fund’s investment strategy.
Goldman Sachs highlighted that long/short hedge funds experienced a significant decline in their short-side alpha returns, resulting in nine consecutive days of negative alpha returns leading up to July 28. In fact, this was the longest streak of negative returns since January 2017. The report also noted a notable deterioration in long-side performance in the past week. A graphic presented in the report demonstrates a roughly 1% decrease in alpha returns for the month.
It is important to note that Goldman Sachs holds one of the world’s largest prime brokerages, granting them access to insights into the movements of large hedge funds and asset managers. Consequently, the information provided in their report offers a valuable glimpse into the current state of these funds.
Despite the challenging performance, global long/short hedge funds managed to remain profitable, with a 0.49% gain in July through Friday, partly driven by the overall stock market rally. This rally generally favors their long bets. A separate Goldman Sachs report published on Friday revealed that the S&P 500 index rose by approximately 2% during the same period.
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One key observation made by Goldman Sachs is the rapid unwinding of short positions throughout July. Various hedge fund strategies have been compelled to close their short positions swiftly to prevent further losses amidst the ongoing market rally. The bank stated that “July is tracking to be one of the largest active de-grossing months for hedge funds in recent years.” Moreover, they pointed out that there have been few instances in the past decade with a de-risking move of equal or greater magnitude.
However, Goldman Sachs believes that the extent of the de-risking may be nearing its end. The report suggests signs of capitulation emerging among hedge funds, indicating that we are approaching the latter stages of the current de-risking episode. This implies that hedge funds may soon reach a turning point and shift their focus back to seeking positive returns, potentially leading to improved performance in the coming months.
Overall, while July has posed significant challenges for global long/short hedge funds, the market’s rally continues to drive optimism. As these funds unwind their bearish bets to adapt, it will be interesting to observe how their portfolios evolve and whether they can capitalize on the current market conditions to deliver stronger results. As always, the world of hedge funds remains dynamic and unpredictable, shaping the financial landscape with its ever-evolving strategies.
