Goldman's index of the most popular positions for hedge funds indicates a 10% loss in October

Hedge funds have been buffeted by volatility in AI stocks, U.S. Treasury bonds and French government debt

October has witnessed several crises: faltering confidence in the sustainability of the artificial-intelligence boom and chaos in the French bond market are chief among them. These adverse moves have wrong-footed the hedge-fund community and inflicted severe losses.

On Thursday alone, Goldman's prime brokerage estimated systematic or trend-following funds lost 1.2%, fundamental strategies declined by 1.1% and multi-strategy funds slumped 1.4%.

It's the first time since the onset of the pandemic in 2020 that all three hedge-fund categories registered declines greater than 1% on the same day.

This observation was made by Goldman Sachs trader Matthew Kaplan in a daily email dispatched to clients on Thursday. Goldman maintains a proprietary index that tracks the relative performance of the stocks most popular with hedge funds against that of the most-shorted names.

That index of popular hedge-fund trades dropped 4.2%, usually an indication of rapid de-leveraging or trade liquidations. Thursday's plunge was the worst recorded since 2011, and so far in October this metric is showing a negative return of 10.4%.

Kaplan pointed out the correlation between Nasdaq NDX and U.S. Treasury note yields is high at present as uncertainties about the ecosystem of AI stocks is forcing capital into the relative safety of bonds BX:TMUBMUSD30Y. Another Goldman analyst, Rich Privorotsky, head of the One Delta product, pointed out the irony that what prompted the weakness in the equity market, namely the problem of spiking bond yields, is now reversing. Problems in the stock market are fuelling demand for bonds.

Goldman's note points out that U.S. hedge funds are shorting U.S. stocks SPX at close to five-year highs.

"Zero signs of offense being played around the AI theme on our pad yesterday," said Kaplan. "While we saw rotational flows out of AI and into defensive pockets of the market during last week's episode, we saw very little of that despite the moves higher in consumer, utilities, and pockets of financials."

-Jules Rimmer