Systematic hedge funds, which rely on algorithms to capitalise on market trends, have experienced losses every day since the beginning of October, according to a Goldman Sachs client note. These funds utilise market signals rather than fundamental analysis of company stocks. As of Monday, these quantitative hedge funds were down approximately 1.8% for the month, marking one of their worst four-day trading periods in nearly two years, Goldman Sachs reported.
The losses are attributed to crowded trades and a market sell-off, where funds, in an attempt to limit further losses, simultaneously rushed to liquidate their positions. This created a scenario where the sheer volume of traders seeking to exit exacerbated the market’s downward pressure, causing prices to deteriorate rapidly. Hedge funds experienced losses on both long positions, anticipating rising asset values, and short positions, betting on declining asset values.
Bruno Schneller, managing director at Erlen Capital Management, described the situation as a “textbook example of a multi-layered quantitative fund unwind,” emphasising that it was not driven by fundamental economic or earnings reassessments but rather a technical deleveraging event. Despite these losses for systematic funds, the Nasdaq and S&P indexes have reached record highs, seemingly unaffected by the ongoing government shutdown and buoyed by ongoing AI-related deals.
While systematic hedge funds have suffered at the start of the month, the Goldman Sachs note indicates that they remain up around 11% for the year to date. The unwinding highlights vulnerabilities when excessive capital targets identical quantitative signals, Schneller added. In the U.S. and Europe, the losses were more pronounced on the “short leg” of trades, where funds had wagered on asset price declines.
