Goldman Sachs Hedge Fund Chief Discusses "Long-Short Dilemma": Return to Fundamentals, "You Can't Control the Market, but You Can Control Your Reaction to It"

Amid sharply fluctuating market sentiment and persistent disruptions from geopolitical noise, Tony Pasquariello, head of the Goldman Sachs hedge fund business, has chosen to “return to fundamentals”—he argues that the current risk-reward profile of the S&P 500 is characterized by a two-way balance, so investors should focus on highly liquid assets and manage total exposure because, “You can’t control the market, but you can control how you react to it.”

Even though the market saw intense volatility in March, the S&P 500 has rebounded 5% from last week’s lows, and is only down about 4% versus the Feb. 27 closing level. Pasquariello noted that, despite the tough conditions in March, confidence in the durability of economic growth has not wavered—Goldman Sachs expects the U.S. GDP growth rate in 2026 to be 2.3%, broadly in line with trend levels.

Meanwhile, as the earnings season gets officially underway next week, earnings expectations are continuing to be revised upward, and U.S. investment-grade corporate credit spreads are showing notable resilience amid heightened volatility and the dual pressure from a large volume of new debt issuance.

Against a backdrop of ongoing improvement in market technicals, Pasquariello believes that the downside asymmetry that previously weighed on the market has been somewhat alleviated, but he also admits that in the face of starkly different geopolitical scenarios such as a “mission accomplished,” a “45-day ceasefire,” or “ground troop involvement,” he has no real predictive edge, making it difficult to support an aggressive directional positioning strategy.

Ongoing technical repair brings hedge fund de-risking close to the finish line

Pasquariello said that improvements in market technicals are one of the key supports for the recent rebound.

Data from Goldman Sachs’ prime brokerage show that hedge funds have been net sellers for seven consecutive weeks, and net exposure has fallen to the 31st percentile within the past three years’ lookback range. Systematic trading funds also sharply reduced long positions over the past month, which means that under the base case there is net buying demand in the market, making upside asymmetry even more pronounced.

In addition, as March comes to an end, options market makers have regained some Gamma exposure. Although corporate buybacks remain constrained until the end of the month and overall dynamic support is limited, the de-risking actions from “fast money” have become the core narrative behind the market’s current structure.

From a performance perspective, March has been generally challenging for hedge funds, but Pasquariello believes that the first quarter is still a period when hedge funds can create significant value for allocators.

Based on Goldman Sachs’ prime brokerage tracking across a range of strategies, the average fund rose about 2% in the first quarter, while the 60/40 portfolio fell by roughly 2% over the same period; so-called “safe assets” such as front-end bonds, precious metals, and defensive stocks were unable to provide effective protection at the most severe moments of risk-off positioning.

Risk conditions are trending toward two-way, making tactical bets harder

Pasquariello acknowledged that over the past month he has continued to believe that local downside asymmetry is greater than upside, but now risk balance has become even more two-way. He attributes this shift in part to the pullback in commodity prices—specifically, the deferred Brent crude oil futures contract traded under COZ6 has fallen 6% since the March 20 cycle high.

He also cautioned that in difficult years, it is not unusual for the S&P 500 to experience a counter-trend rebound of more than 5%; 2018 and 2022 both saw similar patterns.

However, he emphasized that the real challenge lies in the unpredictability of geopolitical scenarios: how the market will respond to any of three very different headlines—“mission accomplished,” a “45-day ceasefire,” or “ground troop involvement”—requires investors to assess each one in turn and ask themselves whether they truly have an edge in judging which scenario is most likely to occur.

Pasquariello’s answer is no, and that is the fundamental reason he is unable to support aggressive tactical positioning. He cited a quote from a senior industry figure as guidance for action today: “You can’t control what the market does, but you can control how you react to the market.”

Based on the above assessment, Pasquariello offered three specific tactical recommendations:

• First, limit risk-taking to securities with top-tier liquidity and avoid getting trapped in liquidity in the current environment;
• Second, given that the momentum factor has been extremely unstable recently and the market still has ongoing leverage exposure to this factor, it is recommended to proactively reduce total equity exposure;
• Third, if you want to capture opportunities from the long side, it is recommended to use a bull call spread strategy rather than simply holding long positions.

He also adds an important reminder: by the time market visibility truly improves, the move is often already underway—no matter which direction it ends up taking. This means that excessive waiting for clear signals is itself a cost.

“Skeptics” vs. “Dreamers”: different takeaways from two sets of data

Pasquariello responds to market pessimists and optimists with two sets of data, respectively. The article states:

For “skeptics,” he shows a chart of Goldman Sachs’ U.S. geopolitical risk basket relative to the S&P 500—this basket includes defense contractors, oil producers, oil tankers and other exposures; as in 2022’s performance, the combination has continued to outperform the broader market and has set new highs for the period, underscoring that a real geopolitical risk premium is in place.

For “dreamers,” he presents a chart of the S&P 500’s 12-month forward earnings expectations. The data show that during recent bouts of market turmoil, earnings expectations have not fallen but risen, and they have nearly doubled since the COVID-19 pandemic.

His conclusion is: if you want to be a serious short seller, you must be willing to clearly anticipate an inflection point downward in earnings expectations here; otherwise, the logic for shorting is not solid.

Risk disclosures and disclaimer

        The market involves risk; investments require caution. This article does not constitute personal investment advice, nor does it take into account any particular users’ specific investment objectives, financial conditions, or needs. Users should consider whether any opinions, viewpoints, or conclusions in this article are consistent with their specific circumstances. Investing based on this is at your own risk and responsibility.