Hedge Fund Bloodbath: Biggest Crash Since Liberation Day... Here Are The 3 Biggest Risks

Another bloodbath in the markets. 

As Goldman writes in its market wrap note, it was a "nowhere to hide" type of tape that everyone expected to see yesterday (and did in the morning before the dip buyers appeared). Momentum Longs were hit hard (GSCBHMOM -5%)...

... following moves lower in Korea (Kospi -7%, Samsung/Hynix -15%+) which feel like the epicenter, bleeding into every Momentum asset (US Semis -4%, Silver -7%, AI Levered -4%). Incidentally, the Korean crash is accelerating on Wednesday with the Kospi already halted once as the Korean market plunges more than 10%, following a 7.2% tumble the previous session, leading to the biggest two-day drop since 2008 with losses again driven by the same momentum stocks that had supercharged the market higher until last month: Samsung, SK Hynix and Hyundai Motor.

As part of the broad-based selling and degrossing, equity length is getting systematically lowered across board (XOP red vs. Crude +4% stands out). Meanwhile, liquidity already dismal, is impaired further and exacerbating price action: according to Goldman E-mini top of book depth sits near Liberation Day levels at $3m (vs $12m ytd avg) meaning it takes only a $3 million trade to move the Emini S&P by one tick. CTA medium term momentum trigger level almost in play 6750. Street also faced with digesting $15bn of paper ($6bn in US) issued last night.

Despite the apparently panic, Goldman writes that activity on its floor was surprisingly muted, a 4 on a 1-10 scale in terms of overall activity levels. The floor finished -95bps for sale for vs a 30-day avg of -21bps. Trading was macro / top-down driven with ETF % of tape hovering around 45% of tape (highest in 5+ years) as investors scrambled to hedge single-stock exposure (see "Crazy Things Are Happening With ETFs").

Single stock activity was very quiet with Mutual Funds sitting on hands and Hedge Funds trading around the edges of short books. Late day, we saw modest signs of Software demand on stabilization (both HF and LO).

Goldman says that client conversations are acknowledging of a potential “buyers live higher” dynamic. Beyond the geopolitical, focus this week on Tech earnings (CRWD & AVGO), ongoing conferences and Friday’s NFP & Retail Sales prints. 

On the back of the broad market sell-off, Goldman's Prime Brokerage estimated hedge funds performance in today session (March 3rd) to be dire, especially for Long/Short funds, which just had their biggest drop since Liberation day.

• Fundamental LS managers down 1.9% mainly driven by beta/market. Some negative alpha (-0.7%) coming from momentum, Info Tech and high vol names. Worst day since tariff drawdown (April 4 2025). Still up 1.7% YTD. Among regional-focused managers, Asia-focused managers (really Korea) were hit the most: down 3.2% today but still up 10.8% YTD.

• Systematic LS Managers down 0.5%. Momentum and crowded longs main negative drivers. Still up 4.7% YTD.

• Multi-Strats: down 1% (equity slice of their portfolio with 4.5x leverage assumption). Negative returns from momentum, crowded longs and high vol names. Still up 5.2% YTD.

Looking ahead, Goldman's PB head Vincent Lin lays out the following 3 biggest risks the bank is watching for (full note here):

1) Asia has been a significant contributor to L/S performance over the past year. Coming into March, Asia Gross/Net allocations are sitting at the highest levels on our record. A sustained drawdown in Asia is among the biggest risks to hedge fund performance.   

2) Long exposure in Semis & Semi Equip stocks globally is at record high levels. Coming into March. Long exposure in Semis & Semi Equip stocks globally is at record high levels. At the same time, Short exposure in Software & IT Services stocks globally is at record high levels

3) Momentum factor exposure for the global Prime book remains near record high levels (99th percentile 1-year, 100th percentile 5-year). Medium-Term Momentum is the biggest positive contributor to global Fundamental L/S alpha returns YTD.  A sustained momentum reversal if it occurs could introduce significant performance challenges, in Goldman's view. From a flow perspective, Semis & Semi Equip is by far the most $ net bought industry group globally YTD, driven by long buys. On the other hand, Software & Services is by far the most $ net sold industry group YTD, driven by short sales.  

More in the full Goldman reports (here, here and here) available to pro subs.