Goldmans Sachs: Hedge Funds Gross Exposure Near Records, Sell-Off Likely after GameStop Event

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by Bhushan Akolkar · 3 min read
Goldmans Sachs: Hedge Funds Gross Exposure Near Records, Sell-Off Likely after GameStop Event
Photo: Depositphotos

The GameStop episode has pushed hedge funds to book billions of dollars in losses. Reports suggest that following it, hedge funds have been moving money out of the market at the fastest rate since 2014.

Last week on Wall Street has been nothing less than dramatic. A Reddit community ‘WallStreetBets’ of retail investors took GameStop Corporation (NYSE: GME) stock to the moon betting against all hedge funds. The GME stock rally was so unprecedented that hedge-fund giants had to square-off their positions booking billions-of-dollars in losses.

Melvin Capital, who has a huge short position on GameStop, saw their money going down the drain. As Reuters reports, US hedge funds sold the most stock last week in a decade’s time. Wall Street banking giant Goldman Sachs warns that the market exposure of hedge funds to stocks is still at record levels. In a note last Friday, the banking giant wrote:

“According to Goldman Sachs Prime Services, this week represented the largest active hedge fund de-grossing since February 2009. Funds in their coverage sold long positions and covered shorts in every sector. Despite this active deleveraging, hedge fund net and gross exposures on a mark-to-market basis both remain close to the highest levels on record, indicating ongoing risk of positioning-driven sell-offs.”

Short sellers in GameStop have booked total losses to the tune of $20 billion last week. It seems like a lot of hedge fund managers aren’t able to make sense of what’s happening on Wall Street. Mohamed El-Erian, chief economic advisor of Allianz said: “What is not clear as yet is whether this disruption will evolve into a market accident”. Dinakar Singh, a former Goldman Sachs trader now running Axon Capital said:

“Being short consensus stocks is just bad business. It is great while it is working but when it isn’t anymore one guy’s problem triggers everyone’s headache. It becomes a circular disaster.”

Hedge Funds Reducing Equity Exposure at Great Speed

A report from Bloomberg suggests that post the GameStop episode, hedge funds are now reducing equity exposure at the fastest speed since 2014. The massive volatility has forced hedge funds to retreat from the market.

The net hedge fund outflows have reached their highest levels since October 2014, shows data from Goldman Sachs. The Goldman Sachs indicator notes that apart from covering their short positions, hedge funds are also liquidating their winners. George Pearkes, global macro strategist at Bespoke Investment Group LLC, said:

“If you’re getting killed on your shorts and need to close those out and reduce overall exposure, you’re going to go first to big winners that have done well”.

On the other hand, the broader market has started bleeding as well. All top three indices – Dow Jones (DJI), S&P 500 (INX), and Nasdaq Composite (IXIC) were down 2% last Friday.

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