Hedge Funds Beat Market After Boosting Short Sales During Rout

(Bloomberg) -- During the recent stock-market selloff, one category of investors thrived -- hedge funds that make both bullish and bearish wagers on equities.

While the MSCI World Index is on course for its worst monthly drop in almost a year, long-short hedge funds have outperformed. Funds that pick stocks based on business fundamentals were down 1% through Monday, while those placing bets using computer models gained 3%, according to data compiled by Goldman Sachs Group Inc.’s prime broker. Over the span, the benchmark slipped 3%. 

Money managers rushed to protect against the downside particularly on Monday, with short sales on exchange-traded funds jumping the most since July among Goldman’s fund clients. That move certainly helped offset whatever losses that hit the long book. 

That anyone employing short positions is outperforming during a market rout shouldn’t come as a surprise. Still, for an industry that’s been criticized for high fees despite lackluster returns in the last decade, the latest performance is perhaps why investors are still willing to pay up for the privilege to stay invested with hedge funds. 

For the market, it’s at least soothing that one of the key players didn’t blow up. The fact that they’re holding up could mean less selling pressure should the market’s losses snowball, a scenario that strategists at Morgan Stanley see as increasingly likely. 

On the other hand, if the S&P 500 resumes its record-setting rally, all the bearish wagers could be forced to unwind, providing further fuel for the advance.

The S&P 500 rose 0.9% as of 11:11 a.m. in New York, snapping a four-day slide. Stocks recovered as concerns about China Evergrande Group’s debt woes eased ahead of Wednesday’s Federal Reserve policy decision. 

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