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Hedge funds ramp up borrowing to five-year high

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The first sharp dip in US and European stocks this year prompted global hedge funds to up their borrowing to the highest level seen in five years in the week ending 19 April, according to a report by Reuters.

The report cites a Goldman Sachs note seen by Reuters as highlighting the increase in leverage provided by banks to fund hedge fund investments. While such loans can help managers amplify returns, they can also increase losses.

According to Goldman Sachs’s note, hedge fund gross leverage, or total borrowing, reached 270% after rising 2.6 points from the prior week, while overall net leverage, which measures a fund’s total assets including borrowing against what it actually owns, increased by 0.5 points to 73% last week.

The increase in leverage was seen among stock-picking hedge funds that employ human traders to make investments rather systematic funds that employ computer algorithms, according to Goldman Sachs, with managers buying equities in the US and Europe after three weeks straight of selling.

The S&P 500 fell more than 5% last week from its 28 March closing high, its biggest retreat since October, while the broadest European index of stocks saw its biggest weekly decline since mid-January losing, falling 1.2%.

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