Hedge funds ramped up their use of leverage to a five-year high last week, aggressively rotating into financial stocks amid steady US interest rates and rising geopolitical tensions, according to a report by Reuters citing a note from Goldman Sachs’ prime brokerage unit.
Gross leverage reached approximately 294%, the highest level since 2020 and up from 271.8% at the start of the year, signalling a sharp uptick in hedge fund risk appetite. The buying spree came in the days following the Federal Reserve’s decision to hold rates steady and just ahead of the US strikes on Iranian nuclear facilities.
According to Goldman’s data, hedge funds boosted exposure to North American and European financials—including banks, insurers, and trading firms – which tend to benefit from higher interest rates. Meanwhile, funds maintained a net short in Asian financials, reflecting regional divergence in positioning.
The report also noted a build-up in short positions across Europe and Asia more broadly, while North America remained modestly net long in aggregate.
In sector positioning, hedge funds increased net long exposure to energy stocks, likely in anticipation of oil market volatility linked to escalating Middle East tensions. Oil prices surged toward one-year highs on fears of Iranian retaliation and possible disruption of the Strait of Hormuz, a critical chokepoint for global crude shipments.
On the performance front, global stock-picking strategies are up over 4% year-to-date, with European returns topping 10%, while global systematic strategies have delivered nearly 12% so far this year.
