By Peter Rudegeair and Gregory Zuckerman

Wall Street's biggest and most successful traders -- the hedge funds that run billions of dollars -- often thrive on stock-market unrest. This past week they floundered like everyone else -- and even helped drive stocks further down.

Monday's heated trading -- when the S&P fell 2.7% and the Nasdaq dropped 4%--capped the biggest two-day flight from risk among hedge funds in four years, according to Goldman Sachs. It was one of the largest such shifts in the past 15 years.

As hedge funds rushed to the exits, their selling pressured their favorite stocks. Alibaba Group, among the most popular hedge-fund positions earlier this month, fell 5.7% Monday. Wells Fargo dropped 6%. Nvidia fell 5.1%, wiping out $139 billion in market value.

The chaos continued Tuesday. As stocks tumbled in the morning, Goldman Sachs sent a note to clients saying stock-picking hedge funds had just endured their worst 14-day period since May 2022.

"We have started to see large and broad-based risk unwinds," or moves by hedge funds to get out of their positions, Goldman said. "Our best guess is that we are currently in the middle innings of this episode."

By the end of that same day, though, Goldman was telling clients something very different: It had been "the best single day" in three years for those hedge funds compared with the overall market, thanks to a price spike in shares of companies most favored by hedge funds.

As the week continued, though, economists ratcheted up the odds on a U.S. recession and markets continued to fall. By the close of trading on Thursday, the S&P 500 had fallen 10% from its Feb. 19 record high. That amounted to just 16 trading days -- the quickest about-face into correction territory in five years and the 11th quickest in the last half-century. A rebound on Friday lifted spirits but left traders more confused about the market's direction.

A new hazard

The pressure on hedge funds has been building for weeks. In February, Millennium Management, one of the most high-profile hedge-fund firms, with assets of about $75 billion, lost 1.3%, its worst month in over six years. It was down another 1.4% this month through March 6, according to a person familiar with its performance.

Such declines are almost unheard of at Millennium. Since its founding by Israel Englander in 1989, Millennium has produced average annualized returns of about 14% and, before this year, it had only about a dozen months in which it lost more than 1%, people familiar with the matter said.

Englander and his team are among the top traders in the hedge-fund business, generating $65.5 billion in profits since he launched the firm. A no-nonsense Brooklyn native, he rarely takes vacation and is fond of telling his traders that they are just dating their favorite stocks and bonds; they're not married to them.

Millennium takes an approach that has become the dominant style of hedge-fund investing -- it's a multimanager firm. Other big ones include Ken Griffin's Citadel and Steve Cohen's Point72.

Multimanager firms employ hundreds of semiautonomous investment teams to trade all kinds of securities and derivatives in order to produce consistent, uncorrelated returns. These firms have attracted tens of billions of dollars in just a few years, and managed a collective $366 billion as of mid-2024.

Their rise has created a new hazard for investors: They have become so big that their investing decisions now impact the broader market. Despite only accounting for about 9% of industry assets in 2023, they account for about 30% of the hedge-fund industry's stock-market footprint, according to Goldman.

Multimanager firms are maniacal about limiting risk.

At Millennium, when a portfolio manager's losses reach 5% of their allotted buying power, the amount of money that team is able to invest usually gets cut in half. When losses reach 7.5%, Millennium typically unwinds all of their trades and shows them the door.

What was designed to be a safety valve can add to selling pressure when different investment teams at the same firm or competing firms hold similar stocks that they are simultaneously trying to get out of.

'Pretty negative'

Cohen is better known to most New Yorkers as the free-spending owner of the New York Mets. He grew up in Great Neck, N.Y., where in high school he hung around a brokerage-firm branch, studying stocks and dreaming up trades. In 1992, he founded hedge fund SAC Capital Advisors and built it into a trading powerhouse before an insider-trading scandal sparked him to turn the firm into a family office, Point72.

Cohen was never personally implicated in the scandal. In 2018, he again began investing other people's money. Last year, he stopped trading his own book at Point72, saying that he didn't want to spend much more time behind computer screens as he approached his 70th birthday.

Cohen turned bearish earlier this year. "You've got a brew of sticky inflation, slowing growth and austerity in the government," the Point72 chief executive said at a conference in Miami last month. "I'm actually pretty negative for the first time in a while."

Over the next few weeks, his firm and his peers started to lose money. Many reacted to the turbulence by selling their favorite stocks, a way to reduce their overall risk exposure. Many funds had taken a liking to the exact same companies, creating what Wall Street calls "crowded trades." As the investors cashed out of these positions, heading for the exits en masse, the hedge-fund selling inflicted outsize damage on these companies.

As of Friday, Point72 was down about 1% for the month and is up slightly on the year, according to a person familiar with the matter. Citadel, meanwhile, is down less than 1% for the year through Friday, according to a separate person.

Traditional stockpicking hedge funds lost money too. The main fund at Bill Ackman's Pershing Square was down 6.2% in March through Tuesday; after finishing up 6% after the first two months of 2025, Pershing Square is down 0.6% this year through Tuesday. Dan Loeb's Third Point lost 3.6% in March through this past Wednesday and is now down 2.7% for the year.

Another sign of the pain: A Goldman Sachs exchange-traded fund that holds what its researchers identified as hedge-fund favorites -- including Alibaba, Amazon.com, Meta Platforms, Microsoft and Nvidia -- was down 14% over the past month through Thursday. The S&P was down 9.7%.

Hedge funds also moved en masse to undo bets they made against disfavored stocks, thereby sending those shares higher. In financial services, commonly shorted stocks among hedge funds, such as Western Union, outperformed, while almost every company they previously wagered would do well, including Capital One Financial, Citigroup and Wells Fargo, underperformed, according to Goldman's prime-brokerage unit.

On Tuesday morning, investors around the country dialed into a Morgan Stanley phone line to hear David Tepper of Appaloosa Management and other top hedge-fund managers discuss the impact Trump administration policies will have on the economy and financial markets.

For about an hour, they discussed the future of tariffs, the nation's debt and interest rates, debating potential scenarios and how they might affect the international economy. There was little consensus, though, largely because the hedge-fund managers said they weren't sure what policies Trump would stick with or initiate.

"Does anyone know?" Tepper asked, according to one participant.

Write to Peter Rudegeair at peter.rudegeair@wsj.com and Gregory Zuckerman at Gregory.Zuckerman@wsj.com

(END) Dow Jones Newswires

March 14, 2025 20:00 ET (00:00 GMT)

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