Goldman Trader Highlights Hedge Fund Selling Surge and Market Trends

Goldman Trader Highlights Hedge Fund Selling Surge and Market Trends 

Nelson Armbrust, a Goldman trader, shared a quick note with clients today, reflecting on the intense selling and de-leveraging within the hedge fund community over the past two days. He described the last two days as particularly eventful, signaling a noticeable shift in market dynamics.

Armbrust mentioned that yesterday, the activity level on their trading floor was quite high, rating it a 7 on a scale of 1 to 10. The floor finished the day as net sellers, with a 190-basis point decline, which stood in stark contrast to the 30-day average of a 50-basis point gain. Among the major players, long-only (LO) funds were significant net sellers, with a reduction of $1 billion, largely driven by selling in sectors like industrials, healthcare, and discretionary goods. On the other hand, hedge funds (HFs) showed some strength as net buyers, with demand particularly strong in macro positions and industrial stocks.

In terms of options activity, it was a notably volatile day. A record-breaking 35.979 million puts were traded in the U.S. alone, making it the highest non-Friday expiry day of all time, surpassed only by two Fridays: March 10, 2023, and February 21, 2024. The volume of SPY puts also spiked, reaching the third-highest level in history. The previous two such spikes had coincided with market bottoms for the S&P 500. Additionally, QQQ put volume hit an all-time high.

Looking at a broader context and using Prime Brokerage (PB) data, Armbrust noted that global equities have experienced the largest two-week notional net selling since February 18th, marking a significant shift since the beginning of the year. On a rolling 10-day basis, as of today, the net leverage for fundamental long/short (L/S) strategies dropped by nearly five percentage points, reflecting the biggest reduction in such leverage since September 2022. Despite this drop in net leverage, gross leverage remains elevated, though the net leverage ratios for both global and U.S. fundamental L/S strategies are now significantly lower than their one-year averages, falling into the 22nd and 13th percentiles, respectively.

In the broader market outlook, Armbrust observed that the pricing for growth assets has adjusted significantly, now aligning more closely with lower growth expectations. While the growth pricing now more accurately reflects risks to the baseline forecast, there are still scenarios where this could adjust further downward, particularly if geopolitical tensions or trade policy risks worsen, or if economic uncertainty continues to dampen spending.

Armbrust continued to emphasize that there is no single asset class that performs well across all scenarios, and that a diversified approach remains key. While the market has downgraded its growth expectations, this presents a more favorable upside scenario for equities, although risks to the downside are still present. For bond markets, the risks remain skewed to the downside for U.S. yields, while gold continues to present upside potential. Furthermore, he believes that the U.S. dollar remains undervalued in terms of its protective role against a deeper trade war.

Despite the challenges posed by growth concerns, Armbrust suggested that equities are likely to recover more quickly from any positive news than rates would react. This is consistent with the typical pattern seen during past growth scares. He pointed out that concerns about growth, spurred by recent economic data and the current focus of policy, have erased gains in a specific sector of the market: the Republican Policy Outperformers vs Underperformers pair (GSP24REP). However, this dip could be seen as an opportunity to buy into the market, as Armbrust remains confident in the administration's de-regulation agenda, as well as its plans for AI development and infrastructure spending. He emphasized that it's not a question of "if" these plans will come to fruition, but rather "when."