Confidence at Zero! Goldman Sachs Interprets Hedge Fund Positions: 'Surrender Liquidation', Largest Loss Since the Pandemic

Currently, only mutual funds and corporate buybacks are countering the trend, and the market's true bottom still needs to wait for the quantitative selling pressure to clear.

Written by: Dong Jing, Wall Street Insights

Last week, hedge funds finally 'raised their hands in surrender.' Goldman Sachs' latest data shows that U.S. fundamental long-short funds significantly reduced leverage in a single week, with the scale of deleveraging reaching the largest since the COVID-19 crash in March 2020, and the net leverage ratio dropping to the 0th percentile over the past five years. The light positions of U.S. stock players are unprecedented in the past five years. Meanwhile, the scale of selling in tech stocks has far exceeded the turmoil seen this summer, with CTA quantitative strategies continuing to sell, and almost all market sentiment indicators are signaling panic.

On Monday (November 9), Goldman Sachs' brokerage data showed that the total leverage ratio of U.S. fundamental long-short funds fell by 8.7 percentage points in a single week, the largest weekly decline since the COVID-19 pandemic in March 2020. The net leverage ratio decreased by 3.7 percentage points to 43.3%, sitting at the 0th percentile of the five-year retrospective period. Goldman trader Pierre Saboureault summarized in Monday's report that deleveraging has accelerated to the highest speed since July, with the net leverage ratio of fundamental long-short funds hitting one-year, three-year, and five-year lows, and last Thursday exhibiting typical characteristics of a 'surrender liquidation.'

Tech stocks are at the forefront. Since early October, Goldman’s U.S. trading desk clients have net sold over $30 billion in tech stocks (TMT and communication services), far exceeding the selling scale of about $21 billion to $23 billion during the momentum correction in July this year. Meanwhile, CTA quantitative strategies sold approximately $11.6 billion in S&P futures and $3 billion in Nasdaq futures over five days last week, and according to model predictions, they will continue to sell under various scenarios in the coming week.

Largest Deleveraging Since the Pandemic: Net Leverage Drops to the Zero Percentile Over Five Years

Goldman trader Nelson Armbrust detailed the scale of this deleveraging in the 'Today's Highlights' report on November 9. The total leverage ratio of U.S. fundamental long-short funds fell by 8.7 percentage points to 207.5% (26th percentile for one year), while the net leverage ratio dropped by 3.7 percentage points to 43.3% (0th percentile for five years). The beta-adjusted total leverage ratio fell nearly 16 percentage points in a single week, with total leverage down 11 percentage points year-to-date and net leverage down 11.6 percentage points, erasing more than half of the total leverage increase of 21.9 percentage points for the entire year of 2025. The long-short ratio of 1.527 is at the 1st percentile for three-year and five-year periods.

Armbrust stated, 'This is a strong signal that positions are being cleaned up.'

Notably, if macro accounts and systematic accounts are included in the global brokerage ledger, the overall total leverage ratio actually slightly increased by 0.1 percentage points to 314.2% (85th percentile for the past year), but the net leverage ratio slid to the 4th percentile, and the long-short ratio dropped to the 3rd percentile. In other words, there are still large exposures in the market, but almost no confidence.

From a global perspective, Saboureault's data shows that global stocks experienced net selling (one-year -1.0 standard deviation), with deleveraging accelerating (one-year -0.8 standard deviation, the largest dollar deleveraging scale since July), and the selling scale of long positions is five times that of short covering. Individual stocks have seen net selling for eight consecutive weeks, while macro products have seen net buying for three consecutive weeks. The global fundamental long-short net leverage ratio of 45.3% is the lowest in the past 12 months, at the 0th percentile for one year and three years, with the long-short ratio being the lowest in Goldman’s ledger over the past five years.

Morgan Stanley previously pointed out that the ongoing risk reduction in the summer and October is the longest sustained risk reduction phase for L/S funds in 15 years—this was still the judgment before last week’s 'bloodbath.' After last week, the net leverage ratio in the U.S. fell from the 51% recorded by Morgan Stanley to 43% according to Goldman Sachs data.

Tech Stocks Face Historic Sell-off, Industrial Stocks Record Largest Net Selling in Five Years

The tech sector is the hardest hit in this round of selling. The information technology sector has the largest net selling scale globally and in the U.S., with the net selling ratio of global information technology stocks this week being comparable to the largest net selling week recorded by Goldman since 2016, and there have been four instances in the past five months that have entered the top five largest net selling weeks in history.

Goldman securities broker Robbie Stankard pointed out that in percentage terms, the scale of global tech stock selling this week is comparable to mid-October and September 2024, both of which are the largest net selling weeks recorded by Goldman since 2016.

Goldman trader John Flood wrote in his report titled 'Turning the Page Last Week': Since early October, Goldman’s U.S. trading desk clients have net sold about $30 billion in tech stocks (TMT and communication services), contributing about $6 billion last week. In contrast, the net selling scale during the July momentum correction was about $21 billion to $23 billion, and the current round of selling has exceeded that by 30% to 40%. The only positive signal is that November 6 (Friday) marked the first net buying of tech stocks in seven consecutive trading days, amounting to about $1 billion.

The industrial sector has also not escaped unscathed. Industrial stocks are the second-largest net selling sector globally, recording the largest percentage net selling in five years, and have seen net selling for four consecutive weeks. On the sub-sector level, electrical equipment, building products, aerospace and defense, trading companies, and distributors led the decline, while passenger airlines and machinery saw net buying. Stankard noted that the decline in electrical equipment and building products is not coincidental—it is directly related to data center power transactions.

From the cumulative situation since the beginning of the year, the net selling of the TMT sector has returned to near the July lows, and the selling scale of the industrial sector exceeded three standard deviations over five days last week, the highest among all U.S. sectors.

In terms of performance, Goldman’s brokerage estimates show that U.S. fundamental long-short funds lost 1.94% last week, while global similar funds lost 1.48%, and the S&P 500 total return index fell 4.74% during the same period. The year-to-date return rate for U.S. stock players is only 5.47%, lagging behind the S&P 500's 8.43%. Tech-themed funds are in an even worse situation, having erased their annual gains by Thursday.

Position Structure: Mag 7 Remains Near Historical Highs, Residential and Power Turn to Net Short

Despite experiencing the largest scale of deleveraging since the pandemic, there are still several noteworthy position structures in Goldman’s ledger. Flood listed five prominent sectors in the current brokerage ledger:

• Mag 7 and large-scale cloud computing (net allocation still close to historical highs)
• Residential / Home Builders (net short in the ledger, long-short ratio at five-year lows)
• Dining (long-short ratio at five-year lows)
• Power / U.S. Electrical Equipment (net short in the ledger, long-short ratio at five-year lows)
• Small and Mid-Cap Biotech (still net long, long-short ratio above 3, but at about three-year lows)

Most notably, after experiencing the largest deleveraging since the pandemic, the net allocation to Mag 7 and large-scale cloud computing remains close to historical highs, while the ledger has turned net short on residential and power/electrical equipment. In other words, while funds broadly sold tech stocks, they still held onto long positions in 'paying parties' (i.e., large-scale cloud computing giants). If the market deteriorates further, this last crowded trade may become the next target for selling.

CTA Quantitative Strategies: Sellers Under Various Scenarios, Potentially Selling Another $45 Billion

Last week, CTA quantitative strategies acted as a downward accelerator. It is estimated that CTA sold approximately $11.6 billion in S&P futures and $3 billion in Nasdaq futures over five days last week.

Even more concerning is the subsequent pressure. Saboureault's summary of systematic strategies shows that systematic/CTA signals are currently negative in 50% to 60% of the global stock markets, covering the S&P 500 and most major markets.

Stankard's scenario analysis shows that in the coming week, regardless of market trends, CTA 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)

In the coming month, only under a strong upward scenario will CTA turn into buyers (buying about $74 billion, of which about $14.4 billion in S&P); under a downward scenario, global stock selling could reach about $149.5 billion.

Key technical levels for the S&P 500: short-term around 7675 points, medium-term around 7549 points, long-term around 7084 points. Currently, the closing prices of the index are all above these levels, which is precisely the reason for the continued selling by quantitative strategies.

Panic Signals Fully Lit, The Only Exception Being Goldman’s Own Sentiment Composite Indicator

Multiple market sentiment indicators have issued strong panic signals.

Goldman’s 'Panic Index': Armbrust pointed out that readings above 9 historically represent good buying opportunities, reaching 9.57 last Thursday and closing at 9.2 over the weekend.

'Velocity Surprise Ratio': This indicator, created by Goldman derivatives experts and strategist Brian Garrett, measures the daily price changes of assets relative to the implied volatility of the previous day's options. This week, the S&P 500 reached the largest value for this indicator in 19 years, with the Nasdaq ranking second and the Russell 2000 in the top five—indicating that the options market has significantly underestimated this volatility, the lowest in over twenty years.

The microstructure of the market is also under pressure: the depth of the S&P futures market has dropped to $4.15 million, far below the average of $11.4 million; the one-month implied correlation has jumped from less than 10% in the summer to about 26%; the implied volatility difference between the Nasdaq and S&P has widened to nearly 9 percentage points, approaching the record of 12.6 points set during the summer momentum collapse; the put option skew remains high at 1.20, while the call option skew has dropped 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 mentioned by Armbrust. At the COVID-19 low in March 2020, this index was -2.03.

Retail investors are also beginning to waver. Saboureault's one-word evaluation of retail investors is 'blinked.' Last week saw the most negative two-day buying and selling skew readings since early June, with S&P 500 retail net buying falling below zero twice. The AAII survey showed that for the week ending November 4, the bearish ratio jumped 7 percentage points to 48.4%, 17 percentage points above the historical average; the CNN Fear and Greed Index slightly rebounded from 19 to 24 but remains in the 'extreme fear' range.

The only exception is Goldman’s own U.S. stock sentiment indicator (Sentiment Indicator). This composite indicator, which covers nine position indicators from institutions, retail investors, and foreign investors, has actually risen from +0.2 to +0.6. The threshold for light position signals is below -1.0, which is currently far from being reached. The reason is that the continuous buying by mutual funds and foreign investors has kept this composite indicator in positive territory, making the reverse bullish signal of 'everyone has exited' incomplete.

Who is Buying? Mutual Funds and Corporate Buybacks Going Against the Trend

On the other side of hedge funds' large-scale liquidation is the 'slow money' buying against the trend.

In terms of mutual funds, according to EPFR data, as of the week ending November 4, global equity funds saw a net inflow of about $89 billion (up from $56 billion the previous week), with about $37 billion flowing into the U.S.; the cumulative net inflow over the past four weeks is about $265 billion, with about $111 billion flowing into the U.S. Tech funds recorded the largest net inflow again, despite AI-related stocks experiencing severe volatility. The scale of cross-border capital inflows into U.S. funds has continued to rise, approaching $1 trillion since 2022.

Regarding corporate buybacks, about 90% of S&P 500 constituents have exited the buyback blackout period, expected to rise to about 93% by the end of this week. Goldman’s buyback trading desk report shows that activity accelerated significantly last week, driven by post-election momentum and an active earnings season, with discretionary open market orders rising from 22% the previous week to 33%, with execution volume about 1.6 times last year's daily average. The buyback authorization scale has reached $1.5 trillion so far in 2026, exceeding the record of $1.37 trillion for the entire year of 2025.

However, supply pressure cannot be ignored—last week, the scale of IPOs and secondary offerings in North America reached $16.3 billion, totaling $536 billion year-to-date, and corporate buybacks still need to continue to digest this supply pressure.

Long-Short Game: After Position Shuffle, the Market Bottom May Still Need to Wait for CTA to Finish Selling

Despite a difficult week, Flood still listed four reasons to maintain a constructive view: the S&P 500's third-quarter year-on-year earnings growth rate tracking to 35%; significant improvement in market breadth; the S&P 500's price-to-earnings ratio at about 18 times, at the 31st percentile over the past decade, with the communication services sector at the 4th percentile of its own ten-year history; companies are actively buying on dips.

According to views from Goldman’s semiconductor analysts quoted by Armbrust, related stocks have clearly entered oversold territory, and the risk-reward for some individual stocks is attractive, specifically naming Nvidia, Broadcom, Applied Materials, and Lam Research.

However, multiple pressures remain unresolved. Saboureault summarized: 'Falling oil prices, declining yields, and volatility need to stabilize for funds to re-enter the market.' Before volatility stabilizes, and before the CPI data on Tuesday and Nvidia's earnings report on November 17, last week may have been the 'surrender moment' for hedge funds, but the true bottom of the market may still need to wait for CTA to complete the remaining selling procedures.