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Battered Hedge Funds See No Relief as Darling Stocks Get Crushed

Battered Hedge Funds See No Relief as Darling Stocks Get Crushed

(Bloomberg) -- The market crash over the last few weeks has been so swift that it ranks among history’s worst, and hedge-fund managers are getting pounded along with everyone else.

Hedge funds that make both bullish and bearish equity bets have plunged 14% this year, on track for the worst quarter on record since Hedge Fund Research began tracking the data. Sure, the broader market is at risk of posting its worst quarter in decades too, but making matters worse for the stock-picking pros are especially poor results from their favorite companies.

In the last week, a basket of stocks heavily owned by hedge funds lagged one that tracks their most shorted shares by 800 basis points, the worst five-day relative performance since at least 2001, according to Goldman Sachs Group Inc. In other words, a group who’s paid to make long and short bets on individual stocks has virtually never done a lousier job. Mutual-fund managers have had a rough go, too.

Battered Hedge Funds See No Relief as Darling Stocks Get Crushed

“The sharp underperformance this week of the most popular stocks among hedge funds and mutual funds suggests that institutional investor selling has accelerated,” David Kostin, Goldman Sachs chief U.S. equity strategist, wrote to clients.

Assessing the effects of a deadly outbreak on the global economy, corporate profits, and stocks has been a lesson in humility for professional investors. Now, after a volatile ride littered with market halts and massive swings, some are looking for signs of a bottom, or any sign of capitulation through and through.

Data from Sundial Capital Research show equity hedge funds have near record low exposure to stocks, and that they’ve been unloading positions throughout the market rout. To some investors, that could be seen as a good omen, considering they can only load up heavily from here, potentially helping the market find support.

Battered Hedge Funds See No Relief as Darling Stocks Get Crushed

But measuring stock exposure can get dicey, and different research shops may offer varying reads. Data from Goldman Sachs Prime Brokerage unit, for example, shows hedge funds have cut their exposure to equities, down about 10 percentage points over the last month, and there still may be more room to run.

“Institutional investor positioning indicators also show a significant decrease in equity exposures, but current levels remain elevated relative to the lows in past corrections,” strategists led by Kostin wrote. “Equity positioning has room to fall further.”

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