By Nell Mackenzie

LONDON, April 22 (Reuters) - Hedge funds are fleeing the stocks of companies that provide discretionary items and services consumers want but do not need, in a sign they anticipate an economic downturn, a Goldman Sachs GS.N prime brokerage note showed.

Hedge funds dumped long positions last week in consumer discretionary and it is the most net sold stock sector this year, said the note to clients seen by Reuters on Tuesday and published Friday. A short position bets that an asset value will decline.

"Hedge funds dumping consumer discretionary stocks strongly suggests they’re bracing for economic trouble, likely a recession," Bruno Schneller, managing director at Erlen Capital Management, said.

U.S. tariff uncertainty has rocked world markets and increased fears of economic recession.

Morgan Stanley analysts this month stopped short of calling a recession, but said the gap between a "sluggish growth outlook and a downturn has narrowed," Reuters reported.

A recession is technically defined by economists as two consecutive quarters of negative GDP growth.

Erlen Capital's Schneller said hedge funds also track other indicators such as bond market volatility and consumer confidence.

A fall in consumer confidence can deter people from spending, hampering economic growth. The U.S. Conference Board's consumer confidence index hit a four-year low in March.

Hedge funds' "aggressive selling, particularly in February and March 2025, aligns with a souring economic outlook and negative wealth effects hitting high-end consumers," Schneller said.

He added the selling indicates hedge funds may shift into defensive assets like consumer staples, or utilities and away from stocks that thrive in growth periods.

"Tariff-driven bond market disruptions and spiking junk bond spreads, the worst since 2008, amplify fears of a consumer-led economic slowdown by late 2025," he said.

Hedge funds' selling centered on North America and Europe, with retail and specialty retail stores, hotels, restaurants and leisure companies, autos and textiles, hardest hit, the Goldman Sachs note showed.

(Reporting by Nell Mackenzie; editing by Dhara Ranasinghe and Barbara Lewis)

((Nell.Mackenzie@thomsonreuters.com;;))