Hedge funds cut long positions as short bets drive losses

Hedge funds reduced their long equity positions after short bets led to losses in the week through Thursday, according to Goldman Sachs’s Prime desk.

Global fundamental long/short funds lost 1.3% during the period, compared to a 0.8% decline in the MSCI World index. The short side of portfolios drove the underperformance.

Systematic funds also fell 1.3%, with short positions causing most of the decline.

For October, fundamental long/short funds are now down 3.7%, worse than the 2.5% loss reported as of Oct. 19. Year-to-date gains have narrowed to 8.9%.

Instead of closing short positions, funds reduced risk across their portfolios. Global equities saw net selling for the third consecutive week, with long sales exceeding short covers by a ratio of 3.4 to 1.

Net leverage in fundamental long/short portfolios dropped to 47%, the lowest level in one year, while gross leverage increased slightly.

Europe was among the few regions with net buying, driven by short covering rather than new long positions.

The concentrated short positions have generated losses without a market rebound. If a rally occurs, the risk of a short squeeze would affect portfolios holding their smallest long positions in a year.