Hedge funds 13F briefing via Goldman Sachs

Surging inflation and interest rate hikes continue adding to the possibility of an economic recession.

As of late, Goldman Sachs released five insights from the latest quarterly Hedge Fund Tracker report. Known for its specialty in risk-managing, hedge fund has an aura of "safe haven", and the way this market participant braces itself for market volatility can be instructive.

Short positions fared much better, yet the median S&P 500 stock still carries a low-level short interest, equivalent to just 1.5% of market cap at a 25-year low.

LEVERAGE AND FLOWS: Hedge fund net exposure has accelerated its decline in recent months, shedding long positions while tapping into shorts. Exposure data calculated by Goldman Sachs Prime Services show net exposure in the 30th percentile vs. the past 5 years compared with record highs in spring 2021.

GROWTH STOCKS: Hedge funds continued to flee from Growth sector and stocks. Rising real interest rates and declining leverage are expected to put a damper on the valuations of long-duration stocks with extremely high multiples.

SECTORS: Hedge funds have ramped up exposure to Industrials and Materials. Fund tilts to Information Technology and Consumer Discretionary are now at the lowest levels in at least a decade.

Putting it all together, a plummeting equity market and the even worse performance of the most popular long positions have led to the worst start of a year on record for hedge fund returns. And hedge funds have accelerated the reduction in leverage and rotation away from Growth stocks they began several quarters ago while at the same time piling up shorts.