Goldman Sachs' head of hedge fund sales Tony Pasquariello advises investors to return to fundamentals, control exposure, and use options for upside as geopolitical uncertainty neutralizes bullish technicals.
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Goldman Sachs sees balanced S&P 500 risk, advises 3-part defensive plan
In a market defined by sharp sentiment swings and persistent geopolitical noise, Goldman Sachs’ head of hedge fund sales, Tony Pasquariello, recommends a return to fundamentals, arguing the S&P 500 now presents a balanced risk-reward profile.
"You can't control what the market does, but you can control your reaction to it," Pasquariello said, quoting a veteran of the industry as his guide for the current environment.
Despite a turbulent March, the S&P 500 has rebounded 5% from its recent lows and sits only about 4% below its February 27 close. This resilience is supported by rising earnings estimates and a strong U.S. investment-grade credit market. However, hedge funds have been net sellers for seven consecutive weeks, with net exposure dropping to the 31st percentile of its three-year range, according to Goldman's prime brokerage data.
The core challenge, Pasquariello noted, is the sheer unpredictability of geopolitical outcomes, making it difficult to justify aggressive directional positions. He argues that investors have no real edge in forecasting whether headlines will announce "mission accomplished," a "45-day ceasefire," or "ground troops deployed."
Technicals Improve as Funds De-Risk
The market's technical backdrop has been improving, providing a key support for the recent rally. The significant de-risking from hedge funds and systematic trading communities over the past month has reduced leveraged long positions, creating potential for net buying demand to re-enter the market.
Despite a difficult March for many funds, Pasquariello highlighted that the first quarter was a period of significant value creation for hedge funds relative to traditional portfolios. The average fund tracked by Goldman's prime brokerage gained approximately 2% in Q1, while a standard 60/40 portfolio fell by about 2% during the same period.
Risk Shifts to Two-Way Street
While he previously saw greater downside risk, Pasquariello now views the market as more balanced. This shift is partly due to a pullback in commodity prices, with benchmark Brent crude futures falling 6% from their March 20 peak.
Still, he cautions that the primary obstacle remains geopolitical uncertainty. Without a clear advantage in predicting the outcome, he recommends a specific three-part tactical approach:
- Confine risk-taking to highly liquid securities to avoid being caught in a liquidity trap.
- Actively reduce gross equity exposure, given the recent instability in momentum factors.
- For investors seeking long-side opportunities, use call option spreads rather than outright long positions.
Data for Dreamers and Doubters
Pasquariello concluded by offering two key data points for opposing market camps. For the "doubters," he pointed to Goldman's U.S. Geopolitical Risk basket—comprising defense contractors, oil producers, and tankers—which continues to outperform the S&P 500 and has hit new highs, confirming a tangible geopolitical risk premium.
For the "dreamers," he highlighted that forward 12-month earnings-per-share estimates for the S&P 500 have actually increased during the recent turmoil and have nearly doubled since the pandemic lows. To be a committed bear, he argued, one must be willing to call for a definitive downturn in these earnings estimates.
This article is for informational purposes only and does not constitute investment advice.