Confidence at Zero! Goldman Sachs Decodes Hedge Fund Positioning: "Capitulation-Style Liquidation," Largest Losses Since the Pandemic

Original author: Dong Jing

Original source: Wall Street See

Last week, hedge funds finally "raised the white flag." The latest Goldman Sachs data shows that U.S. fundamental long-short funds sharply cut leverage in a single week, with the scale of deleveraging the largest since the March 2020 COVID crash, the net leverage ratio falling to the 0th percentile over five years, and U.S. equity investors' positioning the lightest seen in the past five years. At the same time, the scale of selling in tech stocks has far exceeded this summer's bout of turbulence, CTA quant strategies are still selling continuously, and nearly all market sentiment indicators are flashing panic signals.

On Monday (November 9), Goldman Sachs prime brokerage data showed that U.S. fundamental long-short funds saw total leverage fall 8.7 percentage points in a single week last week, the largest weekly decline since the March 2020 COVID pandemic, while net leverage fell 3.7 percentage points to 43.3%, at the 0th percentile of a five-year lookback. Goldman trader Pierre Saboureault summarized in a Monday report that deleveraging has accelerated to its fastest pace since July, with fundamental long-short fund net leverage simultaneously hitting 1-year, 3-year and 5-year lows, and that last Thursday exhibited the typical characteristics of a "capitulation-style" liquidation.

Tech stocks bore the brunt. Since early October, Goldman Sachs U.S. trading desk clients have net sold more than $30 billion of tech stocks (TMT and communication services), far exceeding the roughly $21-23 billion of selling during this July's momentum pullback. Meanwhile, CTA quant strategies sold about $11.6 billion of S&P futures and $3 billion of Nasdaq futures over five days last week, and according to model projections, they will continue selling under various scenarios in the coming week.

Largest Deleveraging Since the Pandemic: Net Leverage Falls to Five-Year 0th Percentile

Goldman trader Nelson Armbrust laid out the scale of this deleveraging in detail in his November 9 "Today's Highlights" report. U.S. fundamental long-short fund total leverage fell 8.7 percentage points to 207.5% (26th percentile over one year), while net leverage fell 3.7 percentage points to 43.3% (0th percentile over five years). Beta-adjusted total leverage fell nearly 16 percentage points in a single week; year-to-date total leverage is down 11 percentage points and net leverage down 11.6 percentage points, erasing more than half of 2025's full-year 21.9-percentage-point increase in total leverage. The long-short ratio of 1.527 sits at the 1st percentile over three and five years.

Armbrust said, "This is a strong signal that positioning is being cleaned out."

Notably, if macro accounts and systematic accounts are included in the global prime brokerage book, overall total leverage actually edged up 0.1 percentage point to 314.2% (85th percentile over the past year), but net leverage slid to the 4th percentile and the long-short ratio fell to the 3rd percentile. In other words, there is still plenty of exposure in the market, but almost no conviction.

From a global perspective, Saboureault's data shows global equities saw net selling (-1.0 standard deviation over one year), the pace of deleveraging accelerated (-0.8 standard deviation over one year, the largest dollar deleveraging since July), and selling of long positions was 5 times the size of short covering. Single stocks saw net selling for an 8th consecutive week, while macro products saw net buying for a 3rd consecutive week. Global fundamental long-short net leverage of 45.3% is the lowest in the past 12 months, at the 0th percentile over 1 and 3 years, and the long-short ratio is the lowest in Goldman's book over the past five years.

Morgan Stanley previously noted that the sustained de-risking this summer and in October was the longest continuous de-risking phase for L/S funds in 15 years—and that was before last week's "bloodbath." After last week, U.S. net leverage fell further from the 51% recorded by Morgan Stanley to 43% in Goldman's data.

Tech Stocks See Historic Selling, Industrials Post Largest Net Selling in Five Years

The tech sector was the hardest hit in this round of selling. Information technology was the sector with the largest net selling globally and in the U.S.; this week's global IT net selling ratio was roughly on par with the largest net selling week in Goldman's records since 2016, and 4 of the past five months have ranked among the top five largest net selling weeks in history.

Goldman equity salesman Robbie Stankard noted that in percentage terms, this week's global tech selling was comparable to mid-October 2024 and September, both the largest net selling weeks in Goldman's records since 2016.

Goldman trader John Flood wrote in his report titled "Turning the Page on Last Week": Since early October, Goldman Sachs U.S. trading desk clients have net sold about $30 billion of tech stocks (TMT and communication services), of which last week contributed about $6 billion. By comparison, net selling during the July momentum pullback was about $21-23 billion, so the current round has exceeded that by 30% to 40%. The only positive signal: November 6 (Friday) was the first net buying of tech stocks in 7 consecutive trading days, at about $1 billion.

The industrials sector was not spared either. Industrials was the second-largest net sold sector globally and posted the largest percentage net selling in five years, with net selling for a 4th consecutive week. At the sub-sector level, electrical equipment, building products, aerospace & defense, and trading companies & distributors led declines, while passenger airlines and machinery saw net buying. Stankard noted that the declines in electrical equipment and building products were no coincidence—these are precisely the data-center power-related trades.

On a year-to-date cumulative basis, TMT net selling has fallen back to near July lows, while industrials saw selling over five days last week exceeding 3 standard deviations, the most among U.S. sectors.

On performance, Goldman prime brokerage estimates show U.S. fundamental long-short funds lost 1.94% last week and global peers lost 1.48%, while the S&P 500 total return index fell 4.74% over the same period. U.S. equity investors' year-to-date return is only 5.47%, trailing the S&P 500's 8.43%. Tech-themed funds fared even worse, erasing their year-to-date gains by Thursday.

Positioning Structure: Mag 7 Still Near Historic Highs, Housing and Power Turn Net Short

Despite the largest deleveraging since the pandemic, there are still several noteworthy positioning structures in Goldman's book. Flood listed five standout sectors in the current prime brokerage book:

Mag 7 and hyperscalers (net allocation still near historic highs)

Housing/homebuilders (book net short, long-short ratio at five-year low)

Restaurants (long-short ratio at five-year low)

Power/U.S. electrical equipment (book net short, long-short ratio at five-year low)

Small- and mid-cap biotech (still net long, long-short ratio above 3, but at roughly a three-year low)

Most striking: after the largest deleveraging since the pandemic, net allocation to Mag 7 and hyperscalers remains near historic highs, while the book has turned net short on housing and power/electrical equipment. In other words, while funds broadly sold tech stocks, they are still clinging to long positions in the "paymasters" (i.e., the hyperscale cloud giants). If the market deteriorates further, this last crowded trade could become the next selling target.

CTA Quant Strategies: Sellers Under All Scenarios, Up to Another $45 Billion of Selling

Last week, CTA quant strategies acted as a downside accelerant. It is estimated that CTAs sold about $11.6 billion of S&P futures and $3 billion of Nasdaq futures over five days last week.

More concerning is the follow-on pressure. Saboureault's systematic strategy summary shows that systematic/CTA signals are currently negative across 50% to 60% of global equity markets, covering the S&P 500 and most major markets.

Stankard's scenario analysis shows that in the coming week, no matter how the market moves, CTAs will be sellers:

• Flat scenario: sell about $23.3 billion (of which about $31.1 billion in S&P)
• Up scenario: sell about $3.9 billion (of which about $23.1 billion in S&P)
• Down scenario: sell about $48.7 billion (of which about $31.5 billion in S&P)

Over the next month, only in a strong rally scenario would CTAs turn buyers (buying about $74 billion, of which about $14.4 billion in S&P); in a down scenario, global equity selling could reach about $149.5 billion.

Key technical levels for the S&P 500: about 7,675 in the short term, about 7,549 in the medium term, and about 7,084 in the long term. The index's closing price is currently above all of these levels, which is precisely why quant strategies continue to sell.

Panic Signals Light Up Across the Board, the Only Exception Being Goldman's Own Sentiment Composite

Multiple market sentiment indicators have already flashed strong panic signals.

Goldman's "Panic Index": Armbrust noted that readings above 9 have historically been good buying opportunities; last Thursday it hit 9.57 and closed the weekend at 9.2.

"Multiple Surprise Ratio": This indicator, created by Goldman derivatives specialist and strategist Brian Garrett, measures an asset's single-day move as a multiple of the prior day's option-implied volatility. The S&P 500 posted its largest reading in 19 years this week, the Nasdaq ranked second, and the Russell 2000 ranked in the top five—the options market's underestimation of this move was the greatest in more than two decades.

Market microstructure is also under pressure: S&P futures order book depth has fallen to $4.15 million, far below the $11.4 million average; 1-month implied correlation has jumped from under 10% this summer to about 26%; the gap between Nasdaq and S&P implied volatility has widened to nearly 9 percentage points, approaching the record 12.6 points set during this summer's momentum crash; put skew remains elevated at 1.20, while call skew has fallen to 0.76.

Goldman's Risk Appetite Index (GSRAII) has fallen to -0.65 but has not yet reached the -1 strong buy signal level cited by Armbrust. At the March 2020 COVID low, the index stood at -2.03.

Retail investors are also starting to waver. Saboureault's one-word assessment of retail was "blinked." Last week saw the two most negative daily buy/sell skew readings since early June, with S&P 500 retail net buying falling below zero twice. The AAII survey showed that in the week ending November 4, bearish sentiment jumped 7 percentage points to 48.4%, 17 percentage points above the historical average; CNN's Fear & Greed Index edged up from 19 to 24 but remained in "extreme fear" territory.

The sole exception is Goldman's own U.S. equity Sentiment Indicator. This composite, covering nine positioning indicators across institutions, retail and foreign investors, actually rose from +0.2 to +0.6. The threshold for a light-positioning signal is below -1.0, and it is far from that now. The reason is that steady buying by mutual funds and foreign investors is keeping the composite in positive territory, leaving the contrarian bullish signal that "everyone is already out" incomplete.

Who Is Buying? Mutual Funds and Corporate Buybacks Step In Against the Tide

The other side of hedge funds' massive liquidation is contrarian buying by "slow money."

On mutual funds, according to EPFR data, global equity funds saw net inflows of about $89 billion in the week ending November 4 (versus $56 billion the prior week), of which about $37 billion flowed into the U.S.; cumulative net inflows over the past four weeks totaled about $265 billion, of which about $111 billion went to the U.S. Tech funds once again recorded the largest net inflows, even as AI-related stocks are experiencing violent swings. Cross-border inflows into U.S. funds continue to climb, cumulatively approaching $1 trillion since 2022.

On corporate buybacks, about 90% of S&P 500 constituents have now exited their buyback blackout periods, expected to rise to about 93% by the end of this week. Goldman's buyback desk reported that activity accelerated sharply last week, driven by post-election momentum and an active earnings season, with discretionary open-market orders jumping from 22% the prior week to 33%, and execution at about 1.6 times last year's daily average. Buyback authorizations year-to-date in 2026 have reached $1.5 trillion, surpassing 2025's full-year record of $1.37 trillion.

However, supply pressure should not be overlooked either—North American IPOs and follow-on offerings totaled $16.3 billion last week and $536 billion year-to-date, and corporate buybacks still need to absorb this supply pressure.

Long-Short Battle: After Positioning Resets, the Market Bottom May Still Have to Wait for CTAs to Finish Selling

Despite a brutal week, Flood listed four reasons for maintaining a constructive view: S&P 500 Q3 EPS growth is tracking at 35% year-over-year; market breadth has improved significantly; the S&P 500 trades at about 18x earnings, at the 31st percentile of the past decade, with communication services even at the 4th percentile of its own 10-year history; and companies are actively buying the dip.

According to Goldman semiconductor analysts cited by Armbrust, the relevant stocks have clearly entered oversold territory and the risk-reward is attractive for some individual names, with Nvidia, Broadcom, Applied Materials and Lam Research singled out as favored.

Yet multiple pressures remain unresolved. Saboureault concluded: "Oil is down, yields are down, and volatility needs to stabilize further before capital can re-enter." Until volatility stabilizes and Tuesday's CPI data and Nvidia's November 17 earnings are in the books, last week may have been hedge funds' "moment of capitulation," but the market's true bottom may still require waiting for CTAs to finish their remaining selling.