Hedge funds caught in crowded trades suffered in Thursday’s stock rally -Goldman Sachs

Nov 3, 2023

By Nell Mackenzie

LONDON (Reuters) – Global hedge funds using algorithms to trade stocks endured one of their worst days of the year on Thursday, a Goldman Sachs note on Friday showed, a sign that a sharp rally in shares on hopes that global rate hikes are over caught some off guard.

Systematic fund managers, particularly those which had short bets on highly traded stock names, got caught trying to get out of crowded trades and found themselves stuck in losing positions, Goldman Sachs said.

A short stock position bets its price will decline.

An index of these funds tracked by Goldman Sachs had their “third worst single day this year,” the investment bank said in a note to clients. They finished the day down 1.1% but were still up 14% year to date as of Thursday, the note said.

Goldman declined to clarify the size of assets under management in the index.

Wall Street’s three main stock indexes rallied nearly 2% on Thursday on hopes that the U.S. Federal Reserve has reached the end of its interest rate hiking campaign, and a batch of upbeat quarterly financial updates added to the bullish mood.

The Fed held interest rates steady on Wednesday as expected and while Chair Jerome Powell left the door open to further tightening, he also acknowledged the impact of a recent surge in bond yields on the economy.

The comments, viewed as hints that the central bank is done with its rate hikes, sent longer-dated U.S. Treasury yields tumbling, which supported stocks.

The hedge fund strategies Goldman Sachs tracked included “market neutral” hedge funds which try not to hold an overwhelmingly long or short view on the market, as well as “arbitrage” funds, which profit from the difference in company stock prices in related sectors.

(Reporting by Nell Mackenzie; editing by Mark Heinrich)


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