Hedge funds are on a roll again. That’s the main takeaway from Goldman Sachs’ latest review of regulatory filings and their own prime brokerage business.
The average US long-short equity hedge fund is up 3 per cent this year, roughly keeping pace with the S&P 500 thanks to the performance of their favourite longs.
Goldman’s Hedge Fund VIP basket of stocks that are the most popular in hedge funds’ 13F filings has returned 10 per cent this year. These longs are now on their strongest bout of outperformance in four years.
Goldman’s measures of hedge fund herding remain near their record highs, despite many funds shuffling out of the Mag7 stocks lately. However, the most interesting aspect of Goldman’s review is that single-stock shorting seems to be on the rise again.
The median hedge fund short interest in S&P 500 stocks collapsed in the post-financial-crisis world and hit record lows after the GameStop shenanigans of 2021, with many instead shifting their shorting to broader indices. Prominent short sellers like Jim Chanos and Nate Anderson have thrown in the towel over recent years.
However, Goldman’s research indicates that short interest in the median S&P 500 has rebounded from a low of about 1.5 per cent to 2 per cent, with activity particularly high in consumer staples stocks like Kroger.
Shorting remains subdued compared to the historical average — and performance is still a net drag on hedge fund returns — but the bounce is intriguing.
Moreover, the combination of more shorting and big longs has lifted gross hedge fund exposure to record highs, according to Goldman’s prime brokerage estimates.
Net exposure remains well below the highs seen in 2021 and 2018, thanks to broader market hedging, but as you can see it is creeping up.
And when it comes to marketwide trading capacity — in terms of how much of their balance sheet that investment banks can rent out to hedge funds — it is swelling gross exposure that is interesting.
Anecdotally we’ve heard rising concerns about how much balance sheet banks are now extending to hedge fund clients. The danger is that even small shocks can then become quite violent (viz, the market reaction to DeepSeek) and meaningful shocks can translate into an industry-wide margin call.
Further reading:
— The hedge fund-bank nexus (FTAV)
