Hedge Funds Sour on U.S. Stocks as October Losses Hit 10.4%

Goldman Sachs' index of the most popular hedge-fund stock trades fell 4.2% on Thursday alone — its worst one-day drop since 2011 — and is down 10.4% for October, according to the bank's prime brokerage.

The damage hit every corner of the hedge-fund world. On the same day, Goldman estimated that systematic or trend-following funds lost 1.2%, fundamental strategies declined 1.1%, and multi-strategy funds slumped 1.4%. That marks the first time since the pandemic's onset in 2020 that all three hedge-fund categories dropped more than 1% on the same day.

The numbers came from Goldman Sachs trader Matthew Kaplan, who flagged the carnage in a daily email to clients on Thursday. Goldman tracks the performance of stocks most popular with hedge funds against the most-shorted names through a proprietary index — and that index is flashing stress.

What's driving the losses?

Two crises converged in October, per the source: faltering confidence in the sustainability of the artificial-intelligence boom, and chaos in the French bond market. Both moves wrong-footed the hedge-fund community and inflicted severe losses.

Kaplan noted that the correlation between the Nasdaq and U.S. Treasury note yields is currently high. Uncertainty around the AI-stock ecosystem is pushing capital into the relative safety of bonds.

That creates an unusual dynamic. Rich Privorotsky, head of Goldman's One Delta product, pointed out the irony: the spiking bond yields that originally prompted equity-market weakness are now reversing. Problems in the stock market are fueling demand for bonds.

A 4.2% single-day drop in the popular-trades index usually signals rapid de-leveraging or outright trade liquidations, not routine portfolio adjustment. When the metric falls that far, funds aren't rebalancing — they're exiting.

Are funds buying the dip or bracing for more?

They're bracing. Goldman's note says U.S. hedge funds are shorting U.S. stocks at close to five-year highs.

Kaplan's client commentary made the defensive posture explicit. "Zero signs of offense being played around the AI theme on our pad yesterday," he said. "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."

In plain terms: during an earlier October wobble, money rotated out of AI names into defensives. This time, even as consumer, utilities and parts of financials moved higher, funds didn't chase those gains. The conviction simply isn't there.

What does this change for investors?

For anyone tracking hedge-fund positioning, the shorting data matters. When funds push shorts toward five-year highs, they're positioning for further downside in U.S. equities — a contrarian signal for some, a warning for others.

The de-leveraging signal matters too. A 10.4% monthly decline in the most-popular-trades index means crowded positions are unwinding fast, and crowded unwinds tend to amplify moves in both directions.

Practitioners should also watch the Nasdaq–Treasury yield correlation Kaplan highlighted. As long as AI uncertainty keeps pushing capital into bonds, equity rallies may stay fragile — and the bond-yield spike that started this weakness has already reversed into a bid for Treasuries.

The forward question is whether October's capitulation marks a bottom or a first leg down. With hedge funds shorting U.S. stocks near five-year highs and showing, in Kaplan's words, zero signs of offense around AI, the smart money isn't betting on a rebound yet.