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Sunday, May 19, 2024

Hedge Fund Borrowing Reaches Five-Year Peak, Per Goldman Sachs

During the week ending April 19, global hedge fund borrowing surged to its highest level in five years, according to a report from Goldman Sachs. This increase in borrowing coincided with heightened trading activity among hedge funds, seeking opportunities in the recent significant decline in U.S. and European stocks.

Banks provide hedge funds with leverage, essentially loans for investment purposes, which can boost potential returns but also elevate risks of losses. Goldman’s note, released on Friday and reported by Reuters on Monday, indicated that gross leverage, representing total borrowing, climbed to 270%, marking a 2.6-point increase from the previous week.

Hedge funds’ overall net leverage, which measures a fund’s total assets including borrowing against what it actually owns, ticked up 0.5 points to 73% last week, said Goldman Sachs.

Stock picking hedge funds not using algorithms to trade were the type of hedge fund that ratcheted up leverage levels, the note added. It did not give a number for systematic hedge fund leverage.

Leverage can be used to take bets against stocks but also to fund the derivatives trades that bet their values will rise. A short trade bets that an asset will fall in value.

Hedge funds U-turned stock bets on Wednesday and Thursday last week after three straight weeks of selling and bought the dip in global equities particularly in the U.S. and Europe, said the bank.

The S&P 500 (.SPX), opens new tab last week fell more than 5% from its March 28 closing high, its biggest retreat since October, while the broadest European index of stocks fell 1.2% in its biggest weekly decline since mid-January (.STOXX), opens new tab.

Though rare, sharp dips and recoveries are not uncommon: the S&P 500 has experienced an average of three pullbacks of 5% or more every year since 1929, a Bank of America analysis showed.

Hedge funds focused bullish trades on technology companies, which had the highest level of net buying in two months. But traders remained short consumer discretionary stocks, such as luxury and travel, the Goldman note said.

Hedge funds bought stocks in most sectors including healthcare, tech, real estate and industrials, it added.

Single stocks saw the largest notional long buying in over a year, while macro products were net sold for the third straight week led by short sales, Goldman said.

North America and Europe were net bought on the week, while Asia was net sold.

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