Hedge funds suffer their worst single month in four years, while calls to bottom-fish rise—Goldman Sachs pours cold water: It’s not time yet!

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Global hedge funds are experiencing the most severe single-month losses since 2022, but real panic has yet to erupt in the market, and there is no sign of a complete deleveraging from either bulls or bears. As bottom-fishing calls rise on Wall Street, Goldman Sachs' judgment is direct and clear: the bottom has not yet arrived.

According to Goldman Sachs Prime Brokerage, global fundamental strategy hedge funds have fallen about 5.4% since March, turning negative for the year to -1.4%; portfolios focusing on U.S. stocks have declined even more, falling 5.7% in the month and losing 3.8% year to date.

Goldman derivatives strategist Brian Garrett wrote in his latest report, "March came in like a lion, and went out like a lion," stating that although several sell-side analysts have rushed to "call the bottom," "rationally and honestly, we're simply not there yet."

This assessment comes amid sharp divisions in the market. The Nasdaq has officially corrected more than 10% from its peak, and some investors have started to see buying opportunities, but data from both Goldman Sachs and Morgan Stanley Prime Brokerage show that hedge funds overall are still operating with high leverage, and the deleveraging process is not complete, which means the downward pressure may not have been fully released.

Losses hit four-year high, but panic is absent

The market turmoil in March has caused heavy losses for hedge funds, but fund behavior shows that real panic selling has not occurred.

Goldman Prime Brokerage data shows that global fundamental hedge funds fell 5.4% in March—the worst single-month performance since 2022. U.S. stock-focused fundamental portfolios dropped 5.7%, the hardest-hit group.

However, Garrett points out, upon scrutinizing positions, one can see investor behavior is far from "panic". This week, global hedge funds' gross exposure hit a five-year high; the direction of net exposure is also interesting—it tightened mainly due to short-selling macro ETFs and single stocks, which essentially remains "risk-appetite" defensive liquidity rather than panic-driven reduction of positions.

Garrett quoted advice from a client years ago: "When you’re really panicked, you just cut size—reduce both long and short." He notes, "That simply isn’t happening in hedge fund books globally right now," with net exposure being the only side showing noticeable contraction.

Morgan Stanley Prime Brokerage echoes a similar view in its latest weekly report. According to Morgan Stanley, although last Monday saw large-scale short covering—one of the largest single-day short coverings since May 2025—U.S. long/short hedge funds’ short leverage remains above pre-April 2025 tariff shock levels (99th percentile in five-year rank). "Despite some net exposure compression, funds as a whole continue to maintain full hedges while holding onto high-conviction long positions," wrote Morgan Stanley.

Morgan Stanley vs. Goldman: Data differs, direction agrees

Although Goldman and Morgan Stanley have different estimates of specific loss amounts, their judgments on the market's overall situation are converging.

Morgan Stanley data shows that as of March 26th, global hedge funds averaged a monthly loss of about 2.8%, roughly half of Goldman’s calculated 5.4%; but Morgan Stanley also points out that the MSCI World Index fell more than 7% over the same period, meaning hedge funds overall managed to contain net losses to some extent. For U.S. long/short equity strategy funds, Morgan Stanley’s data shows an average decline of 4.7% for the month, about 80% of the S&P 500’s fall in the same period, and close to Goldman’s numbers.

By region, European long/short funds gave up nearly 3% for the month; Asian long/short funds fell 4.9%, among the weakest regions. Year-to-date, global hedge funds still posted a small average positive return of about 29 basis points; U.S. long/short funds are down 2.6% YTD, European long/short funds down 1%, and Asian long/short funds still up 82 basis points.

Morgan Stanley points out that an important source of losses this month was heavily crowded long positions that have yet to be substantially reduced. Specifically, the "Global Memory/AI" trade (MSXXGMEM Index) saw some long unwinds this week, but the sector still accounts for around 7% of global net portfolios, and is still overallocated by about 5 percentage points versus market weights. Additionally, hedge funds cut broader AI portfolios (MSXXAI Index), "Mag 7," and AI power (MSXXAIPW) long exposure.

CTAs near their limit, Goldman lists three main signals

Although Garrett remains cautious on calling a bottom, he admits a number of initial bottoming signals are accumulating, and lists three key indicators to watch now.

First, Commodity Trading Advisor (CTA) funds' selling pressure is nearing an extreme. According to Goldman, over the past month, CTAs collectively sold about $190 billion in global equities, with current net short positions quickly approaching historic highs—suggesting supply of downside selling from this source is being exhausted.

Second, market sentiment has spread to retail investors. Garrett writes, "Text messages from college friends and family are starting to sound panicked… 'Bro, what did you do to the market?'" He sees this as a sign of sentiment passing from professionals to retail investors.

Third, S&P 500 call option skew is collapsing. Expectations for a swift rebound are fading, as reflected in the pricing of out-of-the-money calls.

However, Garrett also emphasizes that a true bottom needs several conditions to align, especially policy-related de-risking intentions. "We're playing a game without a set number of rounds—no one can put a timeline on the market—because de-risking requires a consensus to de-escalate, and that’s not obvious right now," he wrote.

Goldman issues multi-department warnings

Around this market turbulence, several Goldman business lines have recently issued frequent warnings, all indicating that market stress has yet to be cleared.

Prime Brokerage data shows that hedge funds have been net sellers of U.S. stocks for six consecutive weeks, with last week’s selling at the fastest pace since April 2025; globally, books have seen eight to nine straight weeks of net selling, with macro hedging and single-stock shorts driving the trend for four straight weeks. "Early signs of a capitulation in capital are starting to appear," the division stated.

The Single Stock Delta team described current trading as "near frozen," with a "buyer strike" on one side and ETF short management demands on the other, forming a standoff—"there’s no sign of any defensive buying during this weakness."

The futures division notes that gold is down about 15% this month, due to tighter financial conditions, a stronger dollar, decreased central bank support, and position adjustments. Goldman believes this drop may be enough, and notes gold’s fundamentals remain valid—a relief in tensions could trigger a rebound.

The derivatives team noticed an interesting phenomenon: Despite the past two trading days feeling rough, the S&P 500 actually did not achieve the weekly implied volatility projected last Friday, meaning the decline has not been swift enough for shorts to realize hedging gains. Also, realized correlation for the S&P 500 remains extremely low for this size of correction; the Goldman derivatives team suggests using sector ETFs or custom basket options to express convexity views.

The ETF team notes that on several trading days this month, ETF trading volume accounted for over 40% of the total market. Energy ETFs (IXE/XLE) have risen for 14 straight weeks, up 40% cumulatively. Nasdaq ETFs (NDX/QQQ) have closed lower five weeks in a row. Total U.S.-listed ETF assets under management have risen for 37 consecutive months and now total $13.5 trillion.

Risk Disclosure and DisclaimerThe market carries risks, and investment requires caution. This article does not constitute personal investment advice and does not take into account the special investment objectives, financial situations, or needs of individual users. Readers should determine whether any views, opinions, or conclusions in this article fit their particular circumstances. Investments made based on this are at your own risk. ```