Hedge Funds Suffer Worst Month in Four Years; As Bottom-Fishing Calls Rise, Goldman Sachs Pours Cold Water: Not Yet!

Global hedge funds are experiencing their most severe single-month losses since 2022, yet market panic has not truly erupted, and neither bulls nor bears have shown signs of complete deleveraging. As calls for bottom-fishing begin to rise on Wall Street, Goldman Sachs' assessment is direct and sober: The bottom has not yet arrived.

According to data from Goldman Sachs' prime brokerage business, global fundamental strategy hedge funds have fallen by approximately 5.4% since the start of March, with year-to-date returns turning negative to -1.4%. Fundamental portfolios focused on US equities suffered even deeper declines, falling 5.7% during the month and losing 3.8% year-to-date.

Brian Garrett, a derivatives strategist at Goldman Sachs, wrote in his latest report, "March came in like a lion and went out like a lion." He noted that while several sell-side analysts have rushed to "call the bottom," "to be rationally honest, we are simply not there yet."

This assertion comes amid intense market divergence. The Nasdaq has officially corrected more than 10% from its peak, leading some investors to sense an entry opportunity. However, prime brokerage data from both Goldman Sachs and Morgan Stanley show that hedge funds generally continue to operate with high positions, and the deleveraging process is not yet thorough, meaning downward pressure may not have been fully released.

Losses Hit Four-Year Highs, But Panic is Missing

The market volatility in March has dealt a heavy blow to hedge funds, but capital behavior suggests that a true panic-driven retreat hasn't happened.

According to Goldman Sachs prime brokerage data, global fundamental hedge funds saw a monthly decline of 5.4%, the worst single-month performance since 2022. US equity fundamental portfolios fell by 5.7%, the hardest-hit segment within the group.

However, Garrett pointed out that a review of positioning data shows investor behavior patterns are far from "panic." Global hedge fund gross exposure reached a five-year high this week; the direction of net exposure changes is equally intriguing—its contraction primarily came from shorting macro ETFs and individual stocks, which is essentially a "risk-on" defensive flow rather than a panic-induced liquidation.

Garrett cited advice from a client years ago: "When you are truly panicked, you just shrink your size—cutting both the long and short sides simultaneously." He pointed out that this scenario has "absolutely not occurred" in current global hedge fund books, with net exposure being the only side showing significant contraction.

Morgan Stanley's prime brokerage division held a similar view in its latest weekly report. According to Morgan Stanley, despite a massive short covering rally last Monday—one of the largest single-day short covering events since May 2025—short leverage for US equity long-short strategy funds remains above the level seen before the April 2025 tariff shock (ranking in the 99th percentile over five years). "Despite the compression in net exposure, funds overall still tend to maintain full hedges while retaining high-conviction long positions," Morgan Stanley wrote.

Morgan Stanley and Goldman Sachs: Data Divergence, Same Direction

While there are discrepancies in specific loss calculations, Goldman Sachs and Morgan Stanley agree on the overall market condition.

Morgan Stanley data shows that as of March 26, global hedge funds fell an average of approximately 2.8% for the month, about half of the 5.4% calculated by Goldman Sachs. However, Morgan Stanley also noted that the MSCI World Index fell by more than 7% over the same period, suggesting that hedge funds as a whole have managed to control net losses to some extent. Focusing on US equity long-short strategy funds, Morgan Stanley's data shows an average monthly decline of 4.7%, equivalent to about 80% of the S&P 500's decline over the same period, which is closer to Goldman Sachs' data.

By region, European long-short funds gave back nearly 3% during the month, while Asian long-short funds fell 4.9%, making it one of the weakest performing regions. Year-to-date, global hedge funds on average still recorded a slight positive return of approximately 29 basis points; US long-short funds are down 2.6% year-to-date, European long-short funds are down 1% year-to-date, and Asian long-short funds still show a positive return of about 82 basis points.

Morgan Stanley pointed out that one major source of losses this month is the crowded long positions held by funds for a long time, which have yet to be significantly reduced. Specifically, the "Global Memory/AI" trade (MSXXGMEM Index) saw long unwinding this week, but the sector still accounts for about 7% of global net portfolios and remains overweight by about 5 percentage points relative to market-cap weighting. Additionally, hedge funds reduced long exposure in broader AI portfolios (MSXXAI Index), the "Mag 7," and AI Power (MSXXAIPW).

CTAs Near Limits, Goldman Sachs Lists Three Key Signals

While Garrett is cautious about the timing of a market bottom, he admits that the market is accumulating several leading signals for a bottom and lists three indicators as the current focus.

First, the selling pressure from Commodity Trading Advisor (CTA) strategy funds is approaching its limit. Goldman Sachs data shows that over the past month, the CTA group has cumulatively sold approximately $190 billion in global stocks, and short positions are quickly nearing historical highs, meaning the supply of short selling from this direction is drying up.

Second, market sentiment has spread to retail investors. Garrett wrote, "Texts from college classmates and family members started to come in with panic... 'Brother, what did you do to the market?'" He views this as a signal of market sentiment transmitting from professional institutions to retail investors.

Third, the S&P 500 call skew is collapsing. Expectations for a rapid rebound are fading, a change reflected in the pricing of out-of-the-money call options.

However, Garrett also emphasized that the emergence of a bottom requires several conditions to mature simultaneously, especially the willingness for policy-driven de-risking. He wrote, "We are playing a game with no fixed number of innings—no one can give the market a timetable—because de-risking requires multiple parties to collectively desire a de-escalation, and that is not yet apparent."

Multiple Goldman Sachs Departments Issue Joint Warnings

Regarding this turmoil, multiple business lines within Goldman Sachs have issued frequent signals in recent reports, collectively indicating that market pressure has not yet been cleared.

Prime brokerage data shows that hedge funds have been net sellers of US stocks for six consecutive weeks, with last week's selling pace being the fastest since April 2025. The global book has seen net selling for 8 to 9 consecutive weeks, with macro hedging and individual stock shorts being the main drivers for four consecutive weeks. The department stated that "early signs of capital capitulation are beginning to appear."

The single-stock Delta team described the current market trading as nearly "frozen," with a "buyer strike" on one side and ETF short management demand on the other, creating a standoff with "no signs of defensive buying amidst the weakness."

The futures department noted that gold has fallen by about 15% this month due to tightening financial conditions, a stronger dollar, decreased central bank support, and positioning adjustments. However, Goldman Sachs believes this decline may be sufficient and points out that the fundamental logic for gold remains intact; if tensions ease, it could trigger a rebound.

The derivatives department noticed an interesting phenomenon: despite poor sentiment over the past two trading days, the S&P 500 index has not actually realized the weekly volatility implied last Friday, meaning the speed of the market's decline is not yet sufficient for short hedging positions to realize profits. Furthermore, the realized correlation for the S&P 500 remains at extremely low levels for a correction of this magnitude. Goldman Sachs' derivatives team suggests that investors express convexity views through sector ETFs or custom basket options.

The ETF department pointed out that on several trading days this month, ETF trading volume accounted for more than 40% of the combined market volume. Energy ETFs (IXE/XLE) have risen for 14 consecutive weeks with a cumulative gain of 40%, while Nasdaq ETFs (NDX/QQQ) have closed down for five consecutive weeks. Total assets under management for US-listed ETFs have grown for 37 consecutive months, currently reaching $13.5 trillion.