According to a report released by Goldman Sachs on Monday, hedge funds, known as "smart money", continued to short sell banks and other financial stocks during the week ending last Friday, as reports of Wall Street banking layoffs and reduced investment banking trading emerged.

According to the report, financial stocks became the sector with the most net selling from Goldman Sachs' institutional brokerage and trading division as of the close last Friday. This division of Goldman Sachs specifically serves global hedge funds. In addition, banks, insurance companies, publicly traded real estate investment trusts, and capital market companies that allow people to buy and sell bonds and stocks all experienced net selling for the fourth consecutive week.

According to Goldman Sachs' data, financial stocks have been sold off for six out of the past seven weeks. The report states that this wave of sell-offs is global in nature, primarily impacting emerging markets in North America, Asia, and Europe.

Data from the London Stock Exchange Group (LSEG) shows that while global investment banking trading volume increased by about one-fifth, the number of merger and acquisition transactions decreased by 25% in the year ending on June 25.

Goldman Sachs points out that the financial sector has become the area with the most net selling from its institutional brokerage and trading division. This trend not only reflects investors' concerns about the current economic downturn and market uncertainty, but also reveals hedge funds' pessimistic outlook on future market trends.

"Especially in the North American market, the selling actions by hedge funds are more apparent, indicating market participants' doubts about the pace of economic recovery," the report states.

Goldman Sachs further explains that the news of layoffs and declining trading volume has been "repeatedly" impacting investor confidence and is a direct challenge to the profit prospects of banks.

"Financial stocks, especially large banks, have previously made substantial profits in a low-interest-rate environment, but now they have failed to translate into actual returns, leading to increased profit pressures. This has led to hedge funds actively positioning themselves for short selling, which we believe is an early layout for the future market trend," the bank added.

On the other hand, Goldman Sachs' report stated that hedge funds have moderately bought into the consumer finance sector.

Therefore, overall, the short-selling behavior of hedge funds to some extent reflects their reflections on the future economic situation, and the strategic adjustments taken as a result have a certain warning effect on investors.

Editor/Emily