Goldman Warns of $80B Hedge Fund Unload and 'Short Gamma' Threat
Here's why trend-following CTAs may be a major headwind to better market action, despite Friday's powerful bounce.
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Investors breathed a sigh of relief following a powerful bounce on Friday after a very chaotic and difficult week. While the DJIA closed at a new all-time high and the pullback in the S&P 500 was extremely mild, there was some deep corrective action in various AI names, cryptocurrencies, precious metals, speculative small-caps, and high-PE growth stocks.
Many of these stocks performed well on Friday, but investors are nervous on Monday morning. There is a growing concern that the action was just an oversold bounce and that the selling will resume this week.
The CTA Threat and Systematic Pressure
Goldman Sachs (GS) warns that large hedge funds known as CTAs could dump as much as $80 billion in assets tied to the S&P 500. A CTA is a financial advisor or hedge fund manager that uses systematic, algorithmic models to trade futures contracts. Unlike traditional mutual fund managers, CTA managers don’t care about fundamentals or valuation.
Typically, CTAs use a trend-following approach and will chase momentum. If the S&P 500 starts a downward trend, the computers automatically trigger sell orders that put additional pressure on the market. CTAs trade all asset classes, including stock indexes, cryptocurrencies, government bonds, currencies, and commodities. They are directionally agnostic and are perfectly happy to go short and profit from a market crash.
CTAs have approximately $350 billion-$400 billion in assets under management. While this is a fairly small part of the $4.8 trillion hedge fund industry, they often use 2x to 5x leverage and act in a correlated manner, which gives them an effective impact of $1 trillion or more.
Volatility Accelerants and Short Gamma
Goldman Sachs is concerned that, as a selloff gains momentum, CTA algorithms will trigger and "pile on," creating a feedback loop of selling. According to Goldman, market stress remains high, liquidity is thin, and options positioning known as "short gamma" could amplify price swings and make trading more volatile.
This is the technical backdrop the market faces as it continues to grapple with rotational action within the AI sector, valuation concerns, and economic worries. Important January jobs news will be out on Wednesday.
Magnificent Seven and Small-Cap Outlook
The major Magnificent Seven names — other than Nvidia (NVDA) —have now reported, but the group is lagging significantly. CTAs could put further pressure on the group if technical weakness continues.
Small-cap earnings season is starting now, which will create action for stock pickers focused on smaller names. However, this is likely to be highly choppy.
There is early pressure on Monday morning with the Nasdaq 100 (QQQ) giving back about 0.5% after bouncing more than 2% on Friday. The morning lows on Friday are now a key technical support level. If they don’t hold, the pressure from CTAs will increase.
My Game Plan: 5 Stocks on My Radar
I am monitoring positions such as Xeris Biopharma (XERS) and ClearPoint Neuro (CLPT) closely for support. I'm also keeping an eye on Viavi Solutions (VIAV) and Solaris Energy (SEI) to see if they can decouple from the broader systematic selling. I'll be looking to add trading shares to various positions if support levels hold during this CTA-driven volatility. Roku (ROKU) , which has been under heavy pressure recently, reports on February 12 and is on my trading radar.
At the time of publication, Rev Shark was long CLPT, XERS, VIAV, SEI, and ROKU.
