Goldman Sachs hedge fund head discusses the “long-short dilemma”: return to fundamentals—“You can't control the market, but you can control your response to it.”
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Amidst intense market sentiment swings and persistent geopolitical noise, Tony Pasquariello, head of Goldman Sachs’ hedge fund business, chooses to "return to fundamentals"—he believes the current risk-reward profile of the S&P 500 is balanced in both directions. Focus should be on high liquidity assets and controlling overall exposure, because "you can’t control the market, but you can control your response to it."
Despite sharp volatility in March, the S&P 500 has rebounded 5% from last week’s low, and is only about 4% down from the February 27 closing price. Pasquariello notes that despite tough market conditions in March, confidence in sustained economic growth remains unshaken—Goldman Sachs forecasts US GDP growth at 2.3% in 2026, roughly in line with the trend level.
At the same time, as earnings season officially kicks off next week, earnings expectations continue to be revised upward, and US investment-grade corporate credit spreads demonstrate notable resilience under the twin pressures of increased volatility and heavy new bond issuance.
Against a backdrop of continued technical improvement in the market, Pasquariello believes the previously dominant downside asymmetry has eased, but he also admits that faced with drastically different geopolitical scenarios such as “mission accomplished,” “45-day ceasefire,” or “ground forces intervention,” he has no true predictive edge, making it hard to support aggressive directional positions.
Continued Technical Recovery, Hedge Fund De-risking Nearing Its End
Pasquariello points out that improved technicals are a key factor supporting the recent rebound.
According to data from Goldman’s prime brokerage, hedge funds have been net sellers for seven consecutive weeks, with net exposure dropping to the 31st percentile over the past three years. Systematic trading funds have also significantly reduced long positions in the past month, suggesting that, under the base case, the market has net buying demand, making upside asymmetry more prominent.
In addition, the month-end in March has allowed options market makers to regain some Gamma exposure. Although corporate buybacks remain restricted until month-end and overall dynamics offer only limited support, the de-risking by "fast money" has shaped the core narrative of the current market structure.
From a performance standpoint, March was generally tough for hedge funds, but Pasquariello believes the first quarter was still a period when hedge funds created significant value for allocators.
According to Goldman Sachs’ prime brokerage tracking of various strategies, average funds gained around 2% in Q1, while the 60/40 portfolio was down about 2% over the same period. "Safe assets" like front-end bonds, precious metals, and defensive stocks failed to provide effective protection during the riskiest moments of risk aversion.
Risk Profile Becomes Two-Sided, Tactical Bets More Challenging
Pasquariello admits that, over the past month, he saw more downside than upside asymmetry, but the risk profile is now more balanced in both directions. He attributes this shift in part to the decline in commodity prices—Brent crude oil futures (COZ6 proxy) have fallen 6% from the March 20 cycle high.
He also reminds that, in tough years, 5%+ countertrend rebounds in the S&P 500 are not uncommon—as seen in 2018 and 2022.
However, he emphasizes that the real challenge lies in the unpredictability of geopolitical scenarios: how the market will react to headlines like "mission accomplished," "45-day ceasefire," or "ground force intervention" is unknown. Investors need to assess each possibility, and ask themselves if they truly have a judgment edge on which is most likely.
Pasquariello’s answer is no, which is why he finds it hard to support aggressive tactical positions. He quotes a senior industry peer as guidance for current action: "You can’t control what the market does, but you can control how you respond to it."
Based on the above, Pasquariello offers three specific tactical suggestions:
First, limit risk-taking to assets with Tier 1 liquidity, and avoid falling into liquidity traps in the current environment;Second, given the recent high volatility in momentum factors and the market’s continued leveraged exposure to them, it’s advisable to proactively reduce total equity exposure;Third, if looking to capture upside opportunities, use call spread strategies instead of outright long positions.
He also attaches an important reminder: by the time market visibility genuinely improves, the move will have already started, regardless of direction. This means that excessive waiting for a clear signal is itself a cost.
"Skeptics" vs. "Dreamers": Two Sets of Data, Different Insights
Pasquariello uses two sets of data to respond to market pessimists and optimists. The article notes:
For the "skeptics", he shows the chart of Goldman’s US Geopolitical Risk basket vs. the S&P 500—which includes defense contractors, oil producers, and oil tankers. As in 2022, this basket continues to outperform the broad market and has hit new highs, proving that geopolitical risk premiums are a real phenomenon.
For the "dreamers", he presents the chart of S&P 500 12-month forward earnings expectations. The data show that during recent market turmoil, earnings expectations have actually risen, and have almost doubled since the COVID pandemic.
He concludes: to be a serious bear, one must be willing to make a clear call that earnings expectations will turn downward; otherwise, the fundamental logic for shorting is quite weak.
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