Hedge funds that try to avoid pain just saw their worst day in nearly two years

By Steve Goldstein

The main selling point of hedge funds to the wealthy investors they cater to is that they are managed in such a way that they can thrive even when the broader market is struggling.

That wasn't the case on Wednesday.

Wednesday saw a continuation of the exodus from popular technology stocks in anticipation that the Federal Reserve will soon cut interest rates, with a report that the U.S. may further restrict sales of microchip equipment to China heaping additional pressure on equities.

According to Goldman Sachs, managers with long/short strategies - i.e., funds that combine bets that companies will appreciate in value with bets that others will decline - had their worst single day of trade since the fourth quarter of 2022.

The chart shows a snapshot taken at 2 p.m. Eastern Wednesday, and actually, things got worse from there, with the Nasdaq 100 NDX closing down 2.9% versus the 2.6% decline in the afternoon.

As measured by Z scores - how many standard deviations from their mean average - they were 3.2 deviations from their one-year average.

The equity component of multi-strategy funds fared only slightly better, down 2.4 deviations.

For the fundamental strategy long/short funds, it was exposure to momentum, high volatility and concentrated stocks that hurt their cause, according to the Goldman analysis. Those funds still are up over 8% this year, and slightly higher for the month.

For the multi-strategy funds, it was exposure to momentum and crowded trades that weighed on performance, the firm said.

-Steve Goldstein

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07-18-24 0514ET

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