Rare! "The smartest money in the world" was beaten up

Hedge funds, known as the "smart money" on Wall Street, are typically regarded as experts in navigating market turbulence. However, they recently faced a Waterloo, exacerbating the market decline.

In the past week, top traders on Wall Street, managing billions of dollars in hedge funds, found themselves in trouble like ordinary investors.

Data shows that on Monday, the S&P index fell by 2.7%, and the Nasdaq index dropped by 4%. Monday and Tuesday were the two days with the most severe declines in U.S. stocks, and the scale of hedge fund sell-offs was the largest in the past four years, and also relatively rare in the past 15 years. As hedge funds exited, the stocks they previously favored faced immense selling pressure, with star stocks like Wells Fargo and Nvidia plummeting.

Meanwhile, Citadel, P72, and Millennium experienced rare losses across the board in February. In February, Citadel Fund recorded its largest monthly decline since May 2021, with major multi-strategy hedge funds like Millennium and P72 also reporting losses. Analysts believe that "multi-strategy funds," which allocate large amounts of capital to multiple teams for management, help reduce risk; however, when the market experiences a significant drop, performance pressure may lead fund managers to collectively liquidate positions, further intensifying market sell-offs.

Multi-Strategy Funds: The Larger the Scale, the Greater the Impact

Multi-strategy funds, commonly referred to in the industry as "Pod Shops," were once seen as a model of innovation in the hedge fund industry.

Goldman Sachs stated that although by 2023 they accounted for only about 9% of industry assets, they represented about 30% of the hedge fund industry's footprint in the stock market. This scale gives their investment decisions significant influence over the broader market. By mid-2024, the total assets under management reached $366 billion.

Multi-strategy funds employ hundreds of semi-autonomous investment teams to trade various securities and derivatives to generate stable returns. They are extremely keen on limiting risk, and when portfolio managers' losses reach a certain threshold, they typically reduce their investment capital or even withdraw from trades altogether.

This risk control mechanism acts as a safety valve in normal market conditions, but during market turbulence, it can trigger a chain reaction. When different investment teams within the same company or competing firms hold similar stocks and attempt to sell simultaneously, the mechanism designed as a safety valve may increase selling pressure.

As a representative of multi-strategy funds, Millennium Management fell by 1.3% in February, marking the company's worst-performing month in six years. As of March 6, the company dropped another 1.4% this month. Such declines are almost unheard of for Millennium Management.

Pessimism Spreads, Deleveraging and the Comeback of "Underdog Stocks"

Point72's founder Steve Cohen turned bearish earlier this year. Steve Cohen stated at a conference in Miami last month:

Inflation remains high, economic growth is slowing, and government tightening policies coexist. In fact, this is the first time in a long while that I hold a rather pessimistic view.

In response to market risks, hedge funds are adjusting their investment strategies and reducing risk exposure.

• On one hand, they have reduced their holdings in previously favored stocks to lower risk exposure, with crowded trades pushing "quality" stocks down;

• On the other hand, stocks that were previously shorted have surged due to covering and reducing positions.

Goldman Sachs' brokerage division noted that stocks frequently shorted by hedge funds (such as Western Union) have performed well, while nearly all the companies they previously bet on (including Capital One Financial, Citigroup, and Wells Fargo) have performed poorly.

This means that as hedge funds cover their positions, those once-unpopular stocks have gained the opportunity to rise. This "reverse betting" introduces new variables to the market and provides investors with the chance to focus on overlooked stocks, but it also increases investment risks