Hedge Funds Cut Stock Leverage at Fastest Pace Since 2020 Crash
As the cross-asset sell-off engulfed Wall Street last week, hedge funds ramped up their bets against stocks while one measure of their market positioning plunged the most since the March 2020 crash.
From retail investors to rules-based systematic traders, appetite for equities is subsiding after a 20% rally this year that’s fueled by euphoria over artificial intelligence.
Fast money investors increased their bearish wagers to drive down their net leverage — a gauge of risk appetite that measures long versus short positions — by 4.2 percentage points to 50.1%, according to Goldman Sachs Group Inc.’s prime brokerage. That’s the biggest week-on-week decline in portfolio leverage since the depths of the pandemic bear market.
At the same time, short selling rose at hedge funds tracked by JPMorgan Chase & Co., while Morgan Stanley’s clients cut their net leverage at a pace not seen since last October.
Fueling the latest bout of pessimism is the resolve by the Federal Reserve to keep interest rates higher for longer — creating pressure on already stretched market valuations. At the peak in July, the S&P 500 was traded at 20 times forecast profits, a multiple that’s 27% higher than the two-decade average.
Source: Goldman Sachs