Introduction
Global equities long/short hedge funds faced a tight spot in the last two days as U.S. bond yields declined, according to notes from two investment banks seen by Reuters. Goldman Sachs and Jefferies reported that the long/short hedge funds, which take positions on the rise and fall of stocks, took a hit after Federal Reserve Chair Jerome Powell’s indications on Wednesday, suggesting the end of the central bank’s monetary tightening. As a result of Powell’s remarks, and in the wake of the two-day Fed policy meeting, stocks rallied, with the S&P 500 index gaining 1.6% over the past two days. U.S. 10-year Treasury notes’ yield, after reaching its lowest level since July due to the Fed’s dovish pivot, remained unchanged at 3.8998% on Friday.
Details on Long/Short Hedge Fund Performance
Jefferies’ trading desk noted that long/short hedge funds experienced their “second-worst two-day move ever” on Wednesday and Thursday, as short bets were squeezed while long positions outperformed. Goldman’s managing director, Marco Laicini, explained that the negative performance was driven by a squeeze in crowded shorts, momentum sell-offs, and a rally in high beta and high volatility stocks. Additionally, Goldman’s global markets team disclosed that computer-driven systematic long/short funds suffered a 2.8% decline on Thursday, representing the worst single-day performance since January 2016. Nonetheless, systematic funds are recording a year-to-date increase of approximately 13%.
Expanding Impact Beyond Long/Short Hedge Funds
Not only were long/short hedge funds affected, but Jefferies also highlighted widespread frustration and pain among systematic, macro, and fundamental long/short managers.
By Carolina Mandl and Summer Zhen
NEW YORK/HONG KONG