Long/Short Hedge Funds Suffer After Fed’s Monetary Policy Shift


  • Long/short hedge funds in Goldman Sachs and Jefferies faced severe losses following remarks made by Fed Chair Jerome Powell implying a discontinuation of the US central bank’s historic monetary policy tightening.
  • A two-day market rally ensued after Powell’s press conference, leading to the second-worst two-day move ever as held by hedge funds.
  • Systematic long/short funds based on computer-driven strategies were reported down by 2.8%, marking the worst single day since January 2016.
  • Despite the recent losses, systematic funds are still up by approximately 13% on a year-to-date basis.

Fed Chair’s Remarks Impacting Hedge Funds

Adverse impacts befell long/short hedge funds under Goldman Sachs and Jefferies following a hint from the Federal Reserve Chairman, Jerome Powell, that the US central bank’s monetary policy tightening could potentially be reaching its end.

The Market Reaction

The comments, made during a press conference signalizing the end of a two-day Federal policy meeting, incited a stock market rally, with an increase of 1.6% in the past two days. Meanwhile, the US yield remained almost the same with a slight fluctuation to 3.8998% on Friday, despite hitting a record low since July due to the softer stance of the Fed.

Hedge Fund Performance Metrics

The trading desk in Jefferies referred to this as “the second worst two-day move ever” for hedge funds from Wednesday to Thursday, with the long/short spread indicating that long positions overpowered short bets.

Investment Banks’ Notes

The systematic equities long/short hedge funds experienced their direst day in about eight years on Thursday as pointed out by Goldman Sachs. They attributed this “negative performance” to a “squeeze in crowded shorts,” a sell-off of momentum and a rally in high beta and high volatility stocks.

Negative Drivers and Overall Performance

High volatility, momentum, and crowded trades (predominantly shorts) were identified as the primary negative drivers. Despite this downward turn, systematic funds are still up by approximately 13% on a year-to-date basis.

Both Goldman Sachs and Jefferies declined to comment on their statements, the content of which had not been publicized previously.

Overall Impact on the Market

Apart from the evident impact on the long/short hedge funds, Jefferies also pointed out the repercussions felt across the market, with systematic, macro, fundamental and long/short managers alike struggling.

This economic shift and its subsequent impact on hedge funds may lead to potential upheaval in forex and trading sectors, specifically affecting assets tied to these funds.

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