Hedge funds ramp up short selling amid market turmoil: Goldman Sachs

Hedge funds accelerated short selling at an unprecedented pace last week as global equity markets faced intense pressure, according to Goldman Sachs’ latest prime brokerage data.

The report, covering the period between March 28 and April 3, reveals widespread deleveraging and risk-off behavior across the hedge fund space, particularly in equity long/short strategies.

Goldman’s Equity Fundamental Long/Short Performance Estimate dropped by 2.52% during the period, underperforming relative to its own historical norms but outperforming the MSCI World Total Return Index, which fell 4.35%. The strategy's beta exposure of 2.67% accounted for the bulk of losses, only marginally cushioned by a 0.15% alpha contribution.

In contrast, systematic long/short strategies fared better. The Equity Systematic L/S Estimate rose 0.68%, driven by 1.05% alpha on the long side, though partially weighed down by a 0.37% beta drag.

Record-levered, yet deleveraging

Despite sharp market moves, gross leverage rose slightly across Goldman’s overall hedge fund book, increasing 0.7 percentage points to 286.1%, placing it in the 94th percentile over the past year. However, net leverage fell sharply by 6.6 points to 67.3%, a one-year low, signaling aggressive derisking.

The long/short ratio also fell to a one-year low of 1.615, as managers shifted to a more defensive stance. Fundamental L/S funds, in particular, saw gross leverage drop 3.7 points to 195.1%, while net leverage slid 5.1 points to 45.6%, underscoring their retreat from directional exposure.

Largest net selling on record

Goldman reported the largest notional net selling of global equities on record (since tracking began in 2010), driven overwhelmingly by short sales, which outpaced long sales at a staggering 8:1 ratio. Every global region was net sold, with North America accounting for approximately 75% of total notional selling.

Single stocks experienced record levels of net selling, while macro products — like ETFs and index futures — saw their largest net selling since January 2024. Nine out of eleven global sectors were net sold, led by Financials, Information Technology, Consumer Discretionary, and Health Care. Only Real Estate and Utilities attracted modest net buying.

Financials under fire

The Financials sector was a standout in the selloff. Hedge funds net sold global Financials at the fastest pace since January 2021 and the second-fastest pace ever recorded by Goldman (since 2016). This was led almost entirely by short sales, making this the largest notional short selling week for the sector on record.

The selling was geographically broad-based:

• North America led in short sales,

• Europe saw both long and short selling, and

• Developed Asia was driven by shorts.

Every Financials subsector, with the exception of Mortgage REITs, was net sold, including Banks, Financial Services, Insurance and Consumer Finance. As a result, Goldman’s prime book is now underweight Financials by 3.9% relative to the MSCI World Index, placing it in the 74th percentile versus the past year.

ETF shorts surge

The rush to hedge risk was especially evident in macro products. Hedge funds executed the largest notional short selling of US Macro Products (Index + ETF) ever recorded by Goldman. ETF short interest surged 22% week-over-week, marking the largest weekly increase in more than a decade.

Shorting was concentrated in:

• Large-Cap Equity ETFs,

• Followed by Sector ETFs and

• Small-Cap Equity ETFs.

ETFs now represent 12.9% of Goldman’s total U.S. short book, up from 10.9% the previous week and hitting the highest level since November 2023.