Recent data from Goldman Sachs reveals a substantial increase in hedge fund leverage, reaching an unprecedented 294%. This marks a significant rise from 271.8% at the beginning of the year, underscoring a heightened risk appetite among funds. This aggressive positioning is primarily fueled by extensive buying of stocks in banks, trading companies, and insurance firms, particularly in North America and Europe. This strategic pivot comes as interest rates remain stable and global geopolitical tensions persist. While financial stocks are a clear focus, hedge funds are also maintaining modest long positions in energy shares, anticipating movements in oil prices.
Hedge fund leverage exhibits a distinct counter-cyclical pattern compared to other financial institutions. During the 2008 financial crisis, for instance, traditional intermediaries like investment banks saw their leverage ratios climb above 40, while hedge funds significantly reduced theirs to approximately 1.4. Research from Columbia Business School highlights that hedge funds began deleveraging as early as 2007, prior to the crisis, showcasing their ability to preempt market stress. This counter-cyclical behavior is a key reason why hedge funds are generally not considered a primary source of systemic risk, despite their reputation for aggressive strategies. On average, a hedge fund typically leverages its equity by about two times, which is relatively modest compared to major financial institutions. Leverage patterns also vary by strategy: relative value funds show the highest average gross leverage at 4.8, followed by credit funds at 2.4, while equity and event-driven funds maintain lower leverage at 1.6 and 1.3, respectively. Changes in hedge fund leverage are more predictable by broader economic factors, such as decreases in funding costs and increases in market values, which both tend to forecast higher leverage.
This increased risk-taking by hedge funds has coincided with strong performance. Global stock picking returns have exceeded 4% year-to-date in 2025, with European strategies outperforming at over 10%. This builds on a successful 2024, where fundamental equity long-short managers recorded their highest average returns (12.75%) since 2020. The technology sector has been particularly attractive, with hedge funds accumulating their largest weekly number of net long positions in over five years, focusing on companies crucial to artificial intelligence, such as semiconductor producers and hardware manufacturers. The Goldman Sachs Hedge Fund VIP list, which tracks popular long positions, has outperformed the S&P 500 by an impressive 11 percentage points over the last six months, marking its strongest outperformance since 2021. This aggressive stance is further evidenced by funds' continued use of macro products across their portfolios, with ETF share of long portfolios and equity futures shorts remaining historically large.
The strategic investment in financial sector stocks, including banks, insurance companies, and trading firms, is a direct response to the current interest rate environment. These institutions generally benefit from sustained elevated rates, which improve their balance sheet performance. This sector-focused approach is visible in regional variations, with funds increasing exposure to North American and European financials, while maintaining slight short positions in Asian financial shares. Furthermore, energy stocks have also garnered substantial hedge fund interest, with net long positions appearing as oil prices approached yearly highs amidst ongoing geopolitical tensions. This targeted allocation strategy appears to be yielding positive results, contributing to the overall increase in global stock picking returns and hedge fund assets under management, which reached approximately $4.9 trillion by Q3 2024.
