Hedge funds reinforce bearish sentiment amid fears of economic slowdown, Goldman says

A global swarm of hedge funds continued to add bearish stock bets to portfolios for a third straight week after new data showed the U.S. economy is slowing at a faster pace than expected, according to a Goldman Sachs note that outlined a shift in hedge fund strategies toward more cautious positioning.

Hedge funds added short positions at a pace of about three times faster than long positions — adding one new long position for every 3.3 short bets. The change in sentiment comes after a pair of worrying economic data releases that showed a slowdown in job creation and a drop in manufacturing activity. Reflecting those concerns, the Nasdaq Composite slipped into correction territory Tuesday, closing down 2.43 percent.

Hedge funds were cutting exposure to seven of 11 global sectors, including financials, industrials, real estate and energy. Healthcare stocks were also selling off at a pace not seen in almost a year. A broad reduction in sector exposure would underscore growing concern among hedge fund managers about the health of the global economy.

Another report from Goldman Sachs indicated that fundamental long/short hedge funds had their worst day since June 2022, with average losses on Friday of 1.8%. That represents weeks of unwinding risky bets that many hedge funds have made to limit likely losses amid rising economic uncertainty.

In short, hedge funds continued to bet pessimistically on an economic slowdown. Weaker-than-expected economic indicators give hedge funds reason to position for a turbulent market ahead, which is not a great thing—it reflects deeper, broader concerns about the sustainability of current economic growth and the potential for further market volatility in the coming months.