Systematic hedge funds have lost money every day since October began, according to a Goldman Sachs client note.

These speculators, whose algorithms ride market trends until they peter out and who use market signals rather than views on the economic aspects of the company stocks they trade, have printed negative returns each day since the start of October, the note released late on Monday showed.

As of Monday, systematic or quantitative hedge funds were down around 1.8% for the month so far in one of the worst four-day trading returns in almost two years, said Goldman.

Losses stemmed from crowded trades and a sell-off where funds, seeking to curtail losses, rushed to dump bets simultaneously.

When traders rush for the exit, the markets move against them as each new speculator looking to exit trades has to wait in a queue as advantageous prices deteriorate.

Hedge funds lost money on long bets expecting asset values to rise as well as short wagers betting that asset prices would fall, said the Goldman note.

"What we've witnessed over the past four days is a textbook example of a multi-layered quantitative fund unwind. This isn't about a fundamental reassessment of company earnings or economic data; it's a technical deleveraging event where the market's own plumbing seized up," said Bruno Schneller, managing director at Erlen Capital Management.

Even as these funds suffered, Nasdaq and S&P indexes reached record levels, shrugging off the ongoing government shutdown while AI-related deals continue to roll on.

Hedge funds, particularly those that follow market signals, will engage in popular bullish trades but also put on hedges. As hedge funds rushed to flee trades, short positions which might have hedged, or protected positions elsewhere, also turned into losses.

"This highlights the inherent fragility that can build when too much capital chases the same quantitative signals," added Schneller.

In the U.S. and Europe, the "pain [was] mostly felt on the short leg", on wagers betting that asset values would decline, the Goldman note said.

Still, systematic hedge funds remain up around 11% for the year to date, said the note.

Source: Investing.com