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 500 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 had previously favored faced immense selling pressure, with star stocks like Wells Fargo and NVIDIA experiencing significant drops.

Hedge funds also incurred massive losses, with Citadel, P72, and Millennium experiencing rare losses across the board in February. In February, Citadel Fund recorded its largest monthly decline since May 2021, and major multi-strategy hedge funds like Millennium and P72 all reported 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 exacerbating 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 means that their investment decisions have a significant impact on the broader market, with total assets under management reaching $366 billion by mid-2024.

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 trading altogether.

This risk control mechanism acts as a safety valve during normal market conditions, but it can trigger a chain reaction during market turbulence. 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 nearly unheard of for Millennium Management.

Pessimism Spreads, Reductions in Positions and the Comeback of "Underdog Stocks"

Steve Cohen, the founder of Point72, turned bearish earlier this year. At a conference in Miami last month, Steve Cohen stated:

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 to reduce risk exposure.

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

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

Goldman's 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 bet" introduces new variables to the market and provides investors with the chance to focus on overlooked stocks, but it also increases investment risks.

Risk Warning and Disclaimer

The market carries risks, and investments should be made cautiously. This article does not constitute personal investment advice and does not take into account the specific investment goals, financial situation, or needs of individual users. Users should consider whether any opinions, views, or conclusions in this article are suitable for their specific circumstances. Investing based on this is at one's own risk